Understanding How Economic Data Triggers Markets

A lot of times, markets aren’t steadily moving in one direction or another. They’re moving sideways, waiting for some event or release of economic data that will trigger the markets.

With scores of data out there, which ones are actually useful for making markets move? I’m going to cover that in this post.

Note: Something to keep in mind is that a certain piece of economic data itself cannot move the market. Like the assassination of Archduke Ferdinand (which lead to WWI), an economic indicator cannot cause the market to move on its own. It merely acts as a trigger.

Unemployment Reports

The unemployment reports, consisting of the Initial Claims and Unemployment Rate, are probably the two most frequent pieces of economic data that are used as triggers. Why? Simple – because they’re important. When the bulls (or bears) need to find a piece of data to trigger the market (a.k.a. an excuse), they need an important piece of data that sums up the economy. GDP reports lag real-time by far too much, where other economic indicators (such as ISM) are too small in scope to “explain” how well the economy’s faring.

You see, in reality, the unemployment reports aren’t actually that good of an indication of the economy. The reason being, the way “unemployment” is calculated is wrong. After a period of time, those who give up looking for work (due to discouragement) are no longer considered as “unemployed”. However, just because the market THINKS that the unemployment reports are important actually becomes important enough for it to move the market. Once again, a self-fulfilling prophecy is born.

Earnings Season

Probably the most powerful piece of data is earnings season, which is “officially” kicked off by Alcoa’s earnings release. The reason earnings season (a time in which most companies release their quarterly earnings) is so important is because it is not one piece of data but multiple successive pieces of data. The impact of one company’s earnings might not be big on the market, but combined, they give a pretty clear picture of how well the economy is doing.

Here, I’d like to give you a tip. Although earnings season is “officially” kicked off by Alcoa, a few companies release their earnings pre-season (kind of like a trailer). Of these pre-season companies, FedEx is the most important one. It is a good indicator of how well the other companies will do (and vice versa). In addition, bigger companies such as Apple or the banks will have a bigger impact on earnings season.

Another thing to note is that no one cares whether earnings will be “good” or “bad”. That’s what they call the “earnings game”. Stocks will go up if they beat forecasts (from analysts), whereas they will go down if they fall short of forecasts. (Further Reading: Why Quarterly Earnings Reports are Bad For Investors)

Case-Shiller Index

The Case-Shiller Index is created by Robert Shiller, a renowned guru (an actual guru, unlike most of those self professed “experts”) who created the index to track housing prices. This index has real meaning to it, because real estate is typically a leading indicator for the economy (meaning that where housing goes, the economy will go). And since most investors recognize the value of this index, it has the power to trigger the markets in one direction or another.

Fed/Central Bank Speeches

This is mainly for the currencies markets.

Whenever the Federal Reserve or ECB (or Japanese central bank) comes out and says something (or holds a meeting), the market will often use it as a trigger. Keep in mind that this mostly affects the currency markets, because currencies are directly impacted by monetary policymakers. Stocks and commodities are also affected by the Fed (and Central Banks), although to a limited extent.


About The Author: This is another post written by Troy from The Financial Economist. Recently, he hasn’t been writing very often on his blog, but he’ll pick up the pace soon.

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5 Responses to Understanding How Economic Data Triggers Markets

  1. Seems like the more I try to figure out triggers the more I get burnt. I have decided to go with what I know which is picking companies I use and feel strongly about. I go with my gut and in most cases have been right. Stocks are too much emotion. Pandora was getting hammered just based on what Apple may or may not do. Too much emotional leverage. Nice post though and looking forward to you picking up putting more content on your site in the near future.

  2. This isn’t an easy topic to understand, and I don’t think that there’s that many people in the world that have a complete grasp on it. Otherwise we’d all be rolling in it!

  3. i.bashiron says:

    could not agree more

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