September economic outlook: What the month’s stock market moves really mean for your finances
- One-day swings in economic indicators like the stock market really can’t tell you a lot about the overall economic outlook. Try to avoid making big changes to your goals or savings in response.
- Behind the scenes, the pros that manage investments assess various risks. It may be a good strategy for you and your savings, too.
Do you have one metric that you use to gauge the economic outlook of the country? For many, that number may be the stock market. Its ups (and conversely its downs) are often seen as a bellwether for our collective financial futures.
A quick look at the recent trajectory of the Dow Jones might inspire optimism: The indicator has trended steadily up for months. But what does the stock market really tell us about what’s ahead for the economy? It’s complicated, and market moves may not be as predictive as we’d like them to be.
Whatever comes, thinking about the market’s relationship to the current economy may help you better manage the impact of ups and downs in the month (and years) ahead.
Down Jones Industrial Average close, 1980 - 2020
What’s in a stock market anyway?
Dow Jones, S&P, NASDAQ: Those are perhaps the most famous of our country’s stock market numbers. “Put simply, a stock market aggregates buyers and sellers of shares of company stocks,” says Heather Winston, assistant director of financial advice and planning at Principal®. “Indexes are designed from a group of stocks or bonds that represent a specific part of a broader market.”
The Dow Jones Industrial Average (DJIA), for example, is a weighted average of the stock prices of 30 U.S.-based companies. (The companies that make up the Dow change constantly.) The Dow going up in one month? It just means that the average stock prices of those companies in that average went up.
In fact, the DJIA isn’t even the only index with “Dow” in its name. There’s also the Dow Jones Transportation Index, a weighted index of 20 transportation sector companies such as trucking and airlines. Indexes also include the Russell 1000 and the Wilshire 5000, to name just a few. There are international stock exchanges and global funds, U.S. asset indexes, and industry indexes, too. “They’re all just different ways of slicing and dicing investment opportunities around the world and here in the U.S.,” Winston says.
From day-to-day, markets go up or down the same way that economies, from year-to-year, tend to operate in cycles, too. Remembering that is a good way to temper assumptions about the future of the economy. “The stock market is not always going to go up and to the right, but none of us have the predictive capability to say when the trend will change course,” Winston says.
Your wallet: Economic and stock market cycles are why financial professionals focus on consistent investing in your future, particularly your retirement, over time. Quick, daily moves in (and out) of investments and savings plans can disrupt overall financial goals. Instead, build on a foundation of well-managed debt, a strong credit score, and increased savings when you can.
|Stock||Ownership claim of a company (private or public)|
|Stock market or exchange||Collection of public stock buyers and sellers such as the New York Stock Exchange (NYSE)|
|Stock index||A measurement of a collection of public stocks (the DJIA, for example)|
|Investment fund (mutual fund, exchange-traded fund, etc.)||A group that pools resources to invest in things like stocks or stock indexes|
Does one company matter to a market?
At any point in time, some companies are on an upswing and some are on a downswing. Transportation and leisure sectors, for example, suffered horribly during the worst of the pandemic. Companies that supplied everyday living staples (toilet paper, we’re looking at you) went gangbusters.
Currently, that’s flipped. Transportation and leisure (e.g., airlines and hotels) have seen big, albeit uncertain, gains. Toilet paper? Household pantries are pretty stocked up. Our collective purchases impact sectors within the economy, which in turn impact company outlooks in those sectors.
Within a stock index, you’ll find a similar dichotomy in companies—some doing well, some having a tougher go. Because an index has a little of this and a little of that, it’s likely diversified in some way. It could be invested not just in travel or toilet paper but travel and toilet paper. The opportunity for growth is spread around.
It’s a helpful way to think about the economy. Some companies may show signs of health and others may struggle. Even if bad news dominates the headlines (and the markets) for a day or two, it may not be a sign of things to come.
The 11 S&P 500 Sectors1
Your wallet: You can build a cushion around your retirement savings through an asset allocation strategy that represents your tolerance for risk . Generally, the closer you are to retirement, the less risk you may want to take with your investment mix. “You can consider controlling some of your exposure to the outcome of economic data and market movement through diversification and how much risk you’re willing to take,” Winston says.
What the experts know about the markets
Sometimes the markets shrug when the news is good (or bad). Take a look at the last few months of unemployment data; some positive indicators have been higher than expected, others lower. There have been market wobbles, but for the most part the course corrections have been minor. What gives?
Experts who manage funds and indexes that are bought and sold on those markets spend all day, every day, looking at the health and welfare of those companies and sectors. They don’t track data just in the days or month ahead, but in the year out and even farther. That’s their job.
That’s what makes individual investing in a stock or fund difficult. Unless you have loads of time, knowledge, and inclination, it’s hard to know what’s really going on day-to-day in a stock market—and just as challenging to know everything about the health of companies and sectors.
“As individuals we don’t have much impact on the market because we invest in small quantities,” Winston says. “It’s really professional trading where large blocks of shares are being bought and sold that typically moves markets.”
Your wallet: Your retirement savings, which are typically invested in various funds and indexes that are bought and sold on stock markets, may be impacted by big swings. But over time and through history, those swings tend to even out. That’s why slowly and steadily building your retirement savings—even deferring 1% more each year—can make a real impact. “Take a long-term approach,” Winston says. “That’s the best way to help ensure that you, as an individual, have the most potential to grow your savings and achieve your goals.”
Take a long-term approach. That’s the best way to help ensure that you, as an individual, have the most potential to grow your savings and achieve your goals”
Heather Winston, assistant director of financial advice and planning
Get the help you need.
- Have you streamlined your asset allocation? Learn how target date funds (TDF) do the work for you.
- Get the help you want. A financial professional may talk you through how changes to your financial goals can shift your saving, especially for retirement. Check with your HR department or employer to see if your company’s retirement savings plan offers this service. Or, we can help you find one.
1 As of August 23, 2021
Investing involves risk, including possible loss of principal.
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Asset allocation and diversification do not ensure a profit or protect against a loss.
Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. These risks are magnified in emerging markets. Small and mid-cap stocks may have additional risks including greater price volatility.
The views and opinions expressed are for informational and educational purposes only as of the date noted and should not be considered investment advice. No forecast based on the opinions expressed can be guaranteed and may be subject to change without notice. No investment strategy, such as diversification, can guarantee profit or protect against loss.
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