CHIME – How Capital Investment Advisors Keeps Tabs On The Pulse Of The Market

Ask a gaggle of financial professionals how they gauge where the economy is going in the coming months, and you’ll get a slew of different answers. Some may look at one metric, while others compute complex (and confusing) algorithms based on dozens of different data points. 

My colleagues and I at Capital Investment Advisors have developed a “temperature test” on where the market and the overall economy is likely headed in the next few months. We call it CHIME. 

CHIME stands for the five different components we keep an eye on: Consumer spending; Housing; Interest Rates (and Inflation); Manufacturing; and Employment.

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Tracking these five economic elements, we believe, provides us with a good idea of where we are and where we’re headed. 

  • Consumer Spending –  The Commerce Department’s Bureau of Economic Analysis (BEA) disseminates data regularly on the state of consumer spending or “personal consumption expenditures” (PCE). Consumer spending is the measure of private household consumption of good and services. The BEA reports on consumer spending at an annualized rate, so that it can compare it to the gross domestic product (GDP). Consumer spending accounts for a significant portion of the US economy. Additionally, the Bureau of Labor Statistics conducts consumer expenditure surveys to help measure spending.

Consumer spending is the demand side of the supply and demand equation. All the noise around consumer spending is well warranted – it’s a powerful indicator of how well the economy is doing, and it can be used as an indicator of consumer optimism. That’s because the consumption of final goods (excluding capital goods or investment assets) is the result of economic activity, and how consumers feel about the current state of economic affairs. 

  • Housing – We look both at Housing Starts and the price of homes. Housing Starts are essentially the number of new single or multi-family housing units. This stat is determined by the number of permits issued for residential construction. This is an important economic indicator because it spills over benefits to a handful of other sectors of the economy, such as retail, manufacturing and utilities.

 Housing prices are similarly significant when making a prognosis of economic health. Americans spend big money on their homes – and what goes in them – which makes housing data a reliable leading indicator of economic activity months in advance.

  • Interest Rates (and Inflation) – Changes in interest rates can have both a positive and negative effect on US markets. Anytime the Federal Reserve Board (Fed) makes a rate change at which banks may borrow money there is a ripple effect across the entire economy. The Fed’s job is to keep things in balance – we don’t want an economy running too hot (think high inflation) or too cold (think recession). So, they take specific economic indicators into their analysis of when to raise rates – and by how much.

 The Fed keenly watches the Consumer Price Index (CPI) and the Producer Price Index (PPI) – both being inflation indicators. When they start to tip over 2% to 3% a year (the Fed’s safety zone), the Fed responds by raising the federal funds rate in efforts to keep rising prices under control. This move typically works, because higher interest rates mean higher borrowing costs, and people tend to spend less under these conditions. And thus, the demand for goods and services drops, which causes inflation to fall.

Stock and bond interest rates, consumer and business spending, inflation, and recessions are all parts of the economic pie that are influenced by interest rates. But, generally speaking, it typically takes at least 12 months for the effects of any increase or decrease in interest rates to be felt. So, we keep this important factor on our radar to get a reading of how hot or cold the economy will be running in the coming year. 

  • Manufacturing – We monitor American manufacturing using the Purchasing Managers’ Index (PMI). The PMI indicates the prevailing direction of economic trends in the manufacturing and service sectors. This index also contains a feature that summarizes whether market conditions (as viewed by purchasing managers) are expanding, contracting, or staying the same. 

This important data can provide valuable information to company decision makers, analysts, and investors about current and future business conditions. The PMI is generated by a monthly survey completed by senior executives at more than 400 companies in 19 primary industries, which are then weighted by their relative contribution to our GDP. A PMI number above 50 means expansion when compared with the previous month, while a PMI reading under 50 means contraction. And, an even 50 indicates that manufacturing has stayed the same.

  • Employment – It goes without saying that folks who have a job can spend and invest, thus driving the economy. Each month, the Bureau of Labor Statistics (BLS) releases a report that shows changes in payrolls and the unemployment rate (UE). These statistics offer a glimpse at the labor markets, but it’s good to remember that employment is a backward-looking indicator. Nevertheless, these data are still relevant – particularly the UE, which measures the number of people looking for work as a percentage of the total labor force. 

When we’re in a healthy economy, the unemployment rate will be anywhere from 3% to 5%. The other side of the coin is that when unemployment rates are high, consumers have less money to spend. This scenario can negatively impact everything from retail stores to GDP, from the housing market and to the stock market. 

Now you have a sense of CHIME, the acronym that’s much bigger than the sum of its parts. We use the CHIME method to help keep tabs on the significant factors of economic health and to keep our fingers on the pulse of what the market may be up to in the coming months.

Disclaimer: This information is provided to you as a resource for informational purposes only and should not be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved. There will be periods of performance fluctuations, including periods of negative returns. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.