Managing your finances should include being aware of financial market
conditions. While your portfolio of individual stocks or bonds will not
perform exactly like the overall market, knowing what the general market is
doing can help you put your investments' results in perspective. Three key
areas to monitor are stocks, interest rates and inflation rates.
Stock market indicators
The most often-quoted stock market indicator is the Dow Jones Industrial
Average (DJIA). In 1884, Charles Dow averaged the closing prices of 11 stocks
considered to be representative of the U.S. economy and the DJIA was
christened. Since then the average has been expanded to include 30 familiar
"blue chip" companies. Occasionally the components are changed make
it more representative of the largest companies in the US. The calculation of
the average is also changed to reflect stock splits.
Another common indicator that includes a larger number of companies is the
S&P 500 index. This index includes the largest 500 companies and is
weighted to reflect the market value of each company. It is more
representative of the overall market, but is still comprised of only the
large companies.
The National Association of Securities Dealers Automated Quotation system
or NASDAQ lists over-the-counter market trades. The NASDAQ composite index
tracks this market and is more representative of market conditions for
smaller companies.
Interest rate indicators
Interest rates have an impact on many parts of the economy, including your
business environment and your finances. Mortgage rates, credit card interest
rates, deposit account earnings rates and corporate borrowing are all
affected by changes in interest rates. Within this category, it is advisable
to follow changes in both long-term rates and short-term rates.
The most common short-term indicator is the interest rate on US Treasury
bills. The rates often quoted for this form of bond are usually based on a 13-
week maturity. The indicator for long-term interest rates is usually the
current rate on 30-year US Treasury bonds. The rates on these two securities
are usually quite different with the longer-term bond usually having a higher
rate than the shorter-term bill. Because of their different maturities, the
values of 30 year Treasury bonds will fluctuate more with changes in interest
rates than the shorter term Treasury bills' values.
Inflation Indicator
The Consumer Price Index (CPI) is the most widely watched measure of
inflation. The government computes this index monthly by measuring changes in
the prices of over 90,000 items. The CPI is reported each month. The annual
change is used for determining adjustments in Social Security payments,
income tax brackets and many other payments and charges.
Monitoring the changes and trends of these indicators is a way to gain a
general understanding of changes in the economy. Being aware of these
indicators' changes and trends can help put your finances into a broader
perspective and make better decisions about your saving, borrowing and
investing.
