Here’s a fun fact: In 2009, Cisco was added to the Dow Jones Industrial Average, but if Apple had been added at that time instead, the index would currently be hovering around 15,000 instead of flirting with 13,000.
OK, one more fun fact related to Apple and stock market indices. Jonathan Golub, chief U.S. equity strategist at UBS, earlier this month analyzed for his clients two different indices—the S&P 500 and the “S&P 500 ex-Apple”, or as some are calling it, the S&P 499.
Clearly, stock market indices aren’t ideal indicators of economic health. Despite that, most laypeople still turn to the Dow or—if they paid attention in high school economics—the S&P 500 to test the economic winds. But what should they be watching instead? I put that question to economists at the Kellogg School and Northwestern University’s economics department.
Everyone I polled agreed on one thing—there is no single perfect indicator. “For predicting future output growth, one indicator is never enough,” said Jonathan Parker, a professor of finance. Robert McDonald, also a professor of finance, seconded that, saying, “I think there’s no one best indicator.”
However, when prodded to pick a few, McDonald said he likes to watch the unemployment rate and the change in employment. Beyond that, he also keeps an eye on the TED spread, or the difference between the London Interbank Offered Rate (LIBOR) and Treasury bills. Since the LIBOR is a good measure of the credit risk of lending to banks and since T-bills are considered risk free, the difference between the two is an overall indicator of credit risk in the economy.
Like McDonald, Robert J. Gordon, a professor of economics, also pays attention to unemployment, though with a twist. He watches new claims for unemployment insurance on a 4-week moving average. He said it is “the most reliable leading indicator of economic turning points.” For current economic conditions, he prefers gross domestic product and gross domestic income.
Parker’s favored indicator is consumer spending. “National consumption aggregates the expectations of all the households in the nation,” he said. “Consumers spend when they feel they can, which is when they see higher and safer incomes in the future, when they find credit markets working well, and when asset values rise. The main caveats? Watch out for asset price increases that can be rapidly reversed or government imbalances that cannot be sustained.”
And finally, assistant dean of the office of research Patricia Ledesma Liébana half-jokingly offered this indicator: “When the job market is tough, graduate school applications go up.” I say half-joking because it’s not a bad indicator at all.
Photo by crazyoctopus.