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 to make it more representative of the largest companies in the U.S. 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 U.S. 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 U.S. 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. The most common indicator now used is the yield on 10 year Treasury bonds.
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 help you make better decisions about your saving, borrowing and investing.