The Market as a Leading Indicator

Investors use the economic outlook

• to get a handle on the market and 
• to identify developing industry sectors.

It is important to note that changes in stock prices 

• normally occur before the actual forecasted changes become apparent in the economy.

Indeed, the current trend of stock prices 

• is frequently used to help predict the course of the economy itself.

Investors in the stock market tend to look into the future to justify the purchase or sale of stock.

If their perception of the future is changing, stock prices are also likely to be changing.

Therefore, watching the course of stock prices as well as the course of the general economy can make for more accurate investment forecasting.

Economic Factors - Economic Indicators

There are several economic factors that change prior to, during, or simultaneously with the business cycle. These factors are examined by analysts to determine the current state of the economy. We will examine the three common types of indicators below.

• Leading Indicators: A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy, but are not always accurate. Bond yields are typically a good leading indicator of the market because traders anticipate and speculate trends in the economy.
  Other types of leading indicators include:
  • building permits (new private housing)
  • industrial production rates
  • money supply
  • S&P 500
  • average of weekly unemployment insurance claims
    
• Lagging Indicators: A measurable economic factor that changes after the economy has already begun to follow a particular pattern or trend. Lagging indicators confirm long-term trends, but do not predict them. Interest rates (especially the prime interest rate) are a good lagging indicator; rates change after severe market changes. Other examples are:
  • unemployment rates
  • corporate profit
  • labor cost per unit of output
    
• Coincident Indicators: An economic factor that varies directly and simultaneously with the business cycle, thus indicating the current state of the economy.
  Some examples include:
  • nonagricultural employment
  • personal income
  • inventory/sales ratio

Economic indicators can have a huge impact on the market and knowing how to interpret and analyze them is important for all investors.

Without further ado, the tutorial Economic Indicators to Know will examine 11 economic indicators we feel investors should understand.

Read more: http://www.investopedia.com/exam-guide/finra-series-6/economic-factors/economic-indicators.asp#ixzz1yhRcBvnR

Where's the U.S. economy headed?

Where's the U.S. economy headed?
Nov 2, 2009 10:37 AM,
By Forrest Laws, Farm Press Editorial Staff

"We don't know how much of that is cash for clunkers or the tax credit for first-time home buyers. We're also likely to see continued high unemployment numbers until companies begin to do more hiring."

U.S. farmers and consumers who are trying to figure out what the future holds aren’t getting much help from Washington these days. As a result, they may need to pick out some economic indicators that could help them chart their course.

Ernie Goss, professor of economics at Creighton University in Lincoln, Neb., identified some of those indicators while giving members of the American Society of Farm Managers and Rural Appraisers his take on the current economic outlook at the ASFMRA’s 80th annual meeting in Denver.

“We’re all sitting on the sidelines, trying to figure out what’s happening,” said Goss, a graduate of the University of Tennessee who has held a number of public and private economic positions over the years. “I’ve never seen this much uncertainty over government policy and the national economy.”

While that might be a good scenario for economists and lawyers, it gives little comfort to farmers and other small business owners and consumers, said Goss. The uncertainty over the so-called cap and trade legislation, health care reform and tax increases are causing nightmares for much of America.

“I also have a small consulting business, and I’m sitting here thinking ‘Should I hire now, should I hire later; should I buy a car now, should I buy a car later; should I buy a house now, should I buy a house later?” he said.

“We have millions of people sitting on the sidelines, and the chief, No. 1 economic problem we’re facing now is the lack of clarity. We don’t know the answers to those kinds of questions.”

Goss said the Commerce Department report issued when he spoke Thursday (Oct. 29) was “a very good sign.” The government reported that the nation’s gross domestic product grew by 3.5 percent in the third quarter of 2009.

“We don’t know how much of that is cash for clunkers or the tax credit for first-time home buyers,” he said. “We’re also likely to see continued high unemployment numbers until companies begin to do more hiring.”

Goss, one of 200 economists who took out a full page ad saying “We are not all Keynesians,” that appeared in the New York Times and the Wall Street Journal earlier this year, said he believes the government’s fiscal policies have not helped the economy all that much.

“Yes, the economy needed some stimulus; there’s no doubt about that,” he said. (Followers of the British economist John Maynard Keynes believe government spending or economic stimulus packages are the key to pulling the economy out of a recession/depression.) “Whether it was the right stimulus package is the question?

“It may be that if the government had allowed some of these big companies like AIG and General Motors to fail, it would have hurt, but we might also have a lot of this behind us now. We also wouldn’t have $11.2 trillion in federal debt.”

So what indicators should you be looking for in the coming months?

• The employment report for October will be released Nov. 6. “I expect the report to show job losses (above 200,000 persons) for a 24th straight month and an increase in the unemployment rate by 0.2 percent,” he said. “If the report goes above10 percent unemployment, that would be very bad. A good report would be only 100,000 jobs.”

• First time and continuing claims for unemployment insurance. This report is released every Thursday. “First time claims above 550,000 will be bearish,” he said. “I expect this number to drop below 500,000 by December (http://www.doe.gov/.)

• The first and most important indicator for November will be the Mid-America and U.S. October Purchasing Manager Institute’s survey released Nov. 2 (http://www.outlook-economic.com/ and http://www.ism.ws/.) “A drop in the national will be bearish (under 50 will be very, very bearish.”

• Goss suggests you keep an eye on the yield for 10-year U.S. Treasuries. If this yield approaches 4 percent within the next month, the Federal Reserve Board will be “between a rock and a hard place.” The rapidly rising yields reflect: 1) Concerns regarding the large increases in the U.S. budget deficit; 2) Rising inflation expectations; and 3) Investors have reduced their risk perceptions and are pulling money out of treasuries and putting it into equity markets (“a good thing”). (http://finance.yahoo.com/)

• Investors will be closely watching retail sales to detect a weak consumer reading. A weak consumer market will be a bad signal for the holiday buying season.

e-mail: flaws@farmpress.com


http://southeastfarmpress.com/news/american-economy-1102/index.html?imw=Y

Investors must analyse data, mere headline numbers may deceive

Wednesday July 8, 2009
Investors must analyse data, mere headline numbers may deceive
The Real Matter - By Pankaj Kumar



WHAT is the difference between a stock that is down 90% versus a stock that was down 80%, then halved? If you were quick enough, you would have the answer right away.

Yes, they are both the same! Some readers would have thought that the stock which was down 90% is in a worse situation compared with the stock which was down 80% earlier but later halved in value.

However, there could be readers who would have thought that the stock which was down 80% and then halved was worse than a stock that is down 90%. In any case, we all now know that the answer is the same and perhaps it is how the question or statement is phrased that matters.

It is also similar to looking at a glass of water and whether it is half full or half empty depends on one’s confidence level, when in actual fact if the glass was exactly 50% filled, it is either half empty or half full.

Moving towards the current economic indicators, it is also interesting to note how one economic figure can be misconstrued as good by some and bad by others when in reality it may well be saying something else.

The issue here is that as most fund managers are busy keeping track of economic data out of the US, Europe and Asia practically on a daily basis, are we seeing the trees from the forest or mainly just looking at headline numbers?

Most economic data are measured either on a month-on-month or year-on-year basis. There are two ways to measure the data points; either by absolute difference (for example consumer confidence data), which to me is more reflective of the real situation, or by percentage change, which can sometimes be misconstrued by investors.


For example, let’s take the durable goods order data out of the US.

The latest reading for May suggests that total durable goods orders stood at US$163.38bil, which compared with the preceding month was higher by 1.8%.

Of course, the headline that we see in the media as well as economic research reports is on the month-on-month change, i.e. the rise of 1.8% and we have seen how positive the market takes these data point as signs that the worst economic recession in living memory is indeed over.

However, if we were to analyse the data deeper, there are several other observations that we can make.First, on a year-on-year basis, the durable goods order contracted by 23.5% and in terms of absolute level, the May total orders were still hovering at levels last seen in 2002/2003!

They say a picture tells a thousand words. Now, let’s look at the above data points in terms of charts.

The chart on the left is the total durable goods orders in absolute form and the chart on the right is based on the widely accepted, month-on-month change. The two charts clearly show two different pictures of the same time frame!

While it can still be argued whether the durable goods orders are recovering or otherwise, it is noteworthy to take into account what a particular chart really means.

Hence, it is imperative for investors to dissect data before coming to a conclusion whether the economic data points released by regulators are in actual fact telling the right story or otherwise.

This is what we call a numbers game and how these data points are communicated to the market has very different interpretations.

Perhaps economists and market analysts need to be more detailed in analysing data points as mere headline numbers may not tell the real story.


Pankaj C Kumar is chief investment officer at Kurnia Insurans (M) Bhd. Readers’ feedback to this article is welcome. Please e-mail to
starbiz@thestar.com.my

Economic indicators and survey show recession easing

Economic indicators and survey show recession easing

WASHINGTON (Reuters) — A key gauge of future economic activity fell for a third month in March, showing the recession may persist through the summer, a nonprofit research group said Monday.

"The recession may continue through the summer, but the intensity will ease," said Ken Goldstein, an economist at the Conference Board.

That view is in line with the latest quarterly survey by the National Association for Business Economics (NABE), released Monday, which indicates the economy is at an inflection point, but not quite a turning point, said Sara Johnson, lead analyst on the survey and an economist at IHS Global Insight.

The results, however, show the recession is abating, she says.

"Key indicators — industry demand, employment, capital spending, and profitability — are still declining, but the breadth of decline is narrowing," she said.

The results mirror announcements by the Federal Reserve last week that there were faint signs of hope that the economy is improving. The Fed said five of its 12 regional banks reported the pace of economic decline was moderating.

Still, the NABE survey of companies and trade associations shows 93% of respondents expect real gross domestic product to decline this year. That was worse than 78% in the January survey.

But signs are improving. In the latest survey, more companies reported rising demand for their products, while fewer reported a decline. The net rising index for industry demand — which measures the difference of those two numbers — improved to -14% in April from -28% in January. The January figure, the survey noted, was the worst since the survey began in 1982.

Net rising indexes swung from negatives to slight positives for the finance, insurance and real estate and services sectors, while demand remained depressed in transportation, utilities, information and communications.

More companies are also seeing their profit margins increase. In the latest survey, 14% of respondents said profit margins were rising, while 45% said they were falling. The rest said they were unchanged, meaning the net rising index was -30%, an improvement from January's -41%.

Capital spending — which is tied to business growth — improved as 15% of respondents reported boosting capital spending the last three months, up from 12% in January. But the majority of respondents, 54%, were leaving capital spending unchanged, and the rest — 31% — were cutting back.

Employment prospects are still down, and wages are at their lowest point since the survey began 27 years ago.

In April, 14% of companies reported employment had risen — the same as in January. But the percentage of companies reporting lower employment was 39%, down from 44%. Goods-producing industries fared worst, with 83% reporting job losses, and none reporting growth. The financial, investment and real-estate sector showed signs of stabilizing.

The outlook for jobs remains grim, with losses expected to continue the next six months. Only 16% of companies predicted an increase in hiring at their firms, slightly worse than January's 17%. But the percentage of companies predicting job losses improved to 33% from 39%.

The NABE survey of 109 members was taken March 23 through April 1.

In its report, the Conference Board said its leading economic index declined 0.3% last month, steeper than the 0.2% analysts were expecting. The index for February was better than previously reported, falling 0.2% instead of 0.4%. But it was revised lower in January to a 0.2% decline, instead of a 0.1% increase.

The index has not risen in nine months. In September and December it was unchanged; it experienced the largest drop during that period in October, when it fell 1%.

Real money supply and interest rates both improved in March, but not enough to counterbalance the drag of building permits, stock prices and supplier deliveries.

The past six months, the index has fallen 2.5%, compared with a smaller 1.4% drop the previous six months.

The Coincident Index, a measure of current conditions, fell for a third month, by 0.4%, primarily due to declines in employment and industrial production.

The Lagging Index, which provides a look backward, has been on a down trend since July 2007, the Conference Board said. Its 0.4% decline in March was caused by weakness across all components, which include duration of unemployment, inventory levels, and outstanding loans.

"There have been some intermittent signs of improvement in the economy in April, but the leading economic index and most of its components are still pointing down," Goldstein said.

Contributing: Associated Press

Copyright 2009 Reuters Limited.

http://www.usatoday.com/money/economy/2009-04-20-leading-indicators_N.htm

Understanding effects of economic indicators on stock market

Understanding effects of economic indicators on stock market
Published: 2009/02/25

When the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be a golden opportunity to spot some good stocks at a bargain

IF YOU have been following the news on a daily basis, you surely would have heard the repeated news on the fall of the US and European markets that are currently spreading gloom across the globe.


With the risk of global recession on the increase, global stock markets are not left unscathed by the predicament the world's economic giants are in. Stock markets worldwide are left to face strong selling pressures that are wiping out their asset values.


As a result, you might be wondering whether your portfolio (albeit confined to the local business environment) is strong enough to weather the adverse external shocks that are causing jitters in markets across the globe.


Why do you need to understand and monitor the economic situation?


A company's earnings and future prospects depend largely on the overall business and economic climate. No matter how strong a company's fundamental is, if the economy is down, the performance of a company will inevitably be affected somewhat. Cyclical stocks will probably face a larger impact compared to non-cyclical or defensive stocks.


Meanwhile, the stronger companies will be able to weather the harsh economic situation better than the weaker or less well managed ones.


Therefore, as an investor, it is important for you to understand the macro picture of the economy, not just the sector/industries or stock/company that you are interested in investing in.


What is an economic indicator

An economic indicator is in simple terms, the official statistical data of a certain economic factor that are published periodically by the government agencies, which an investor can use to gauge the economic situation. It allows investors to analyze the past and current situation and to project the future prospects of the economy.


There are three basic indicators that matter to investors in the stock market, namely inflation, gross domestic product (GDP) and the labour market.


* Inflation


Inflation is important for all investments, simply because it determines the real rate of return that you get from your investment. For instance, if the inflation rate is 5 per cent and the nominal return is 8 per cent, this means that your real rate of return is 3 per cent as the 5 per cent has been eaten by inflation.


Inflation's impact on the stock market is even more complicated. A company's profit will be affected by higher inflation. Its input cost will increase and the impact of the increase will depend on how much of the incremental cost the company is able to pass on to its consumers. The amount that the company will have to absorb will reduce its profits, assuming all else being equal.


The stock market will suffer further negative impact if it is accompanied by increased interest rates as the bond market is seen as a cheaper investment vehicle compared to stocks. When this happens, investors will sell off their stocks to invest in bonds instead.


The most commonly used indicator for the measurement of inflation is consumer price index (CPI). It consists of a basket of goods and services commonly purchased by consumers, such as food, housing, clothes, transportation, medical care and entertainment.


The total value of this basket of goods and services will be compared with the value of the previous year and the percentage increase will be the inflation rate.


On the other hand, where the value drops, it will be a deflation rate. A steady or decreasing trend will be favourable to the overall stock market performance.


* Gross Domestic Product


Another important indicator is the GDP measurement. It is the total value of goods and services produced in a country during the period being measured. When compared to the previous year's reading, the difference between these two readings indicates whether a country's economy is growing or contracting. GDP is usually published quarterly.


When the GDP is positive, the overall stock market will react positively as there will be a boost in investor confidence, encouraging them to invest more in the stock market. This will in turn boost the performances of companies.

When the GDP contracts, consumers tread cautiously and reduce their spending. This in turn will affect the performance of companies negatively, thus exerting more downward pressure on the stock market.


* Labour market


The unemployment rate as a percentage of the total labour force will basically indicate the country's economic state. During an economic meltdown, most companies will either freeze hiring or in more severe cases downsize, by cutting costs and reducing capacity. When this happens, the unemployment rate will increase, which in turn, creates a negative impact on market sentiment.


Bottom line


By understanding the economic indicators, you should be able to gauge the current state of economy and more importantly, the direction in which its headed. Pooling this knowledge together with the detailed research on the companies that you are interested in, you should be well equipped to make sound investment decisions.


Bear in mind that when the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be your golden opportunity to spot some good stocks at a bargain that are worth buying.


Malaysia's economic indicator data can be obtained from the Department of Statistics website at www.statistics.gov.my



Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.


http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC4/Article/index_html

» RELATED STORIES
Programme on maximising value in challenging times
Why investors behave the way they do
What causes stock prices to move?
Shield yourself from scams
Raising children to be 'money-smart'
Key habits of successful investors
Why selling is a common problem
Benjamin Graham's timeless key investing principles
Insight into bonds

Understanding effects of economic indicators on stock market

Understanding effects of economic indicators on stock market
Published: 2009/02/25

When the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be a golden opportunity to spot some good stocks at a bargain

IF YOU have been following the news on a daily basis, you surely would have heard the repeated news on the fall of the US and European markets that are currently spreading gloom across the globe.


With the risk of global recession on the increase, global stock markets are not left unscathed by the predicament the world's economic giants are in. Stock markets worldwide are left to face strong selling pressures that are wiping out their asset values.


As a result, you might be wondering whether your portfolio (albeit confined to the local business environment) is strong enough to weather the adverse external shocks that are causing jitters in markets across the globe.


Why do you need to understand and monitor the economic situation?


A company's earnings and future prospects depend largely on the overall business and economic climate. No matter how strong a company's fundamental is, if the economy is down, the performance of a company will inevitably be affected somewhat. Cyclical stocks will probably face a larger impact compared to non-cyclical or defensive stocks.


Meanwhile, the stronger companies will be able to weather the harsh economic situation better than the weaker or less well managed ones.


Therefore, as an investor, it is important for you to understand the macro picture of the economy, not just the sector/industries or stock/company that you are interested in investing in.


What is an economic indicator

An economic indicator is in simple terms, the official statistical data of a certain economic factor that are published periodically by the government agencies, which an investor can use to gauge the economic situation. It allows investors to analyze the past and current situation and to project the future prospects of the economy.


There are three basic indicators that matter to investors in the stock market, namely inflation, gross domestic product (GDP) and the labour market.


* Inflation


Inflation is important for all investments, simply because it determines the real rate of return that you get from your investment. For instance, if the inflation rate is 5 per cent and the nominal return is 8 per cent, this means that your real rate of return is 3 per cent as the 5 per cent has been eaten by inflation.


Inflation's impact on the stock market is even more complicated. A company's profit will be affected by higher inflation. Its input cost will increase and the impact of the increase will depend on how much of the incremental cost the company is able to pass on to its consumers. The amount that the company will have to absorb will reduce its profits, assuming all else being equal.


The stock market will suffer further negative impact if it is accompanied by increased interest rates as the bond market is seen as a cheaper investment vehicle compared to stocks. When this happens, investors will sell off their stocks to invest in bonds instead.


The most commonly used indicator for the measurement of inflation is consumer price index (CPI). It consists of a basket of goods and services commonly purchased by consumers, such as food, housing, clothes, transportation, medical care and entertainment.


The total value of this basket of goods and services will be compared with the value of the previous year and the percentage increase will be the inflation rate.


On the other hand, where the value drops, it will be a deflation rate. A steady or decreasing trend will be favourable to the overall stock market performance.


* Gross Domestic Product


Another important indicator is the GDP measurement. It is the total value of goods and services produced in a country during the period being measured. When compared to the previous year's reading, the difference between these two readings indicates whether a country's economy is growing or contracting. GDP is usually published quarterly.


When the GDP is positive, the overall stock market will react positively as there will be a boost in investor confidence, encouraging them to invest more in the stock market. This will in turn boost the performances of companies.

When the GDP contracts, consumers tread cautiously and reduce their spending. This in turn will affect the performance of companies negatively, thus exerting more downward pressure on the stock market.


* Labour market


The unemployment rate as a percentage of the total labour force will basically indicate the country's economic state. During an economic meltdown, most companies will either freeze hiring or in more severe cases downsize, by cutting costs and reducing capacity. When this happens, the unemployment rate will increase, which in turn, creates a negative impact on market sentiment.


Bottom line


By understanding the economic indicators, you should be able to gauge the current state of economy and more importantly, the direction in which its headed. Pooling this knowledge together with the detailed research on the companies that you are interested in, you should be well equipped to make sound investment decisions.


Bear in mind that when the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be your golden opportunity to spot some good stocks at a bargain that are worth buying.


Malaysia's economic indicator data can be obtained from the Department of Statistics website at http://www.statistics.gov.my/


Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.

http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC4/Article/

http://www.reuters.com/article/marketsNews/idINKLR30358420090227?rpc=611
TABLE-Malaysia economic indicators - Feb 27, 2009

Recession: What Does It Mean To Investors?

Recession: What Does It Mean To Investors? by Investopedia Staff, (Investopedia.com)

When the economy heads into a tailspin, you may hear news reports of dropping housing starts, increased jobless claims and shrinking economic output. How does this affect us as investors? What do house building and shrinking output have to do with your portfolio? As you'll discover, these indicators are part of a larger picture, which determines the strength of the economy and whether we are in a period of recession or expansion.

The Phases of the Business Cycle

In order to determine the current state of the economy, we first need to take a good look at the business cycle as a whole. Generally, the business cycle is made up of four different periods of activity extended over several years. These phases can differ substantially in duration, but are all closely intertwined in the overall economy.

Peak - This is not the beginning of the business cycle, but this is where we'll start. At its peak, the economy is running at full steam. Employment is at or near maximum levels, gross domestic product (GDP) output is at its upper limit (implying that there is very little waste occurring) and income levels are increasing. In this period, prices tend to increase due to inflation; however, most businesses and investors are having an enjoyable and prosperous time.

Recession - The old adage "what goes up must come down" applies perfectly here. After experiencing a great deal of growth and success, income and employment begin to decline. As our wages and the prices of goods in the economy are inflexible to change, they will most likely remain near the same level as in the peak period unless the recession is prolonged. The result of these factors is negative growth in the economy.

Trough - Also sometimes referred to as a depression, depending upon the duration of the trough, this is the section of the business cycle when output and employment bottom out and remain in waiting for the next phase of the cycle to begin.

Expansion/Recovery - In a recovery, the economy is growing once again and moving away from the bottoms experienced at the trough. Employment, production and income all undergo a period of growth and the overall economic climate is good.

Notice in the above diagram that the peak and trough are merely flat points on the business cycle at which there is no movement. They represent the maximum and minimum levels of economic strength. Recession and recovery are the areas of the business cycle that are more important to investors because they tell us the direction of the economy.

To further complicate matters, not all business cycles go through these four steps sequentially. For instance, during a double dip recession, the economy goes through a recession followed by a short recovery and another recession without ever peaking.

Recession Versus Expansion

Recession is loosely defined as two consecutive quarters of decline in GDP output. This definition can lead to situations where there are frequent switches between a recession and expansion and, as such, many different variations of this principle have been used in the hope of creating a universal method for calculation. The National Bureau of Economic Research (NBER) is an organization that is seen as having the final word in determining whether the United States is in recession. It has a more extensive definition of recession, which deems the following four main factors as the most important for determining the state of the economy:

Employment
Personal income
Sales volume in manufacturing and retail sectors
Industrial production>

By looking at these four indicators, economists at the NBER hope to gauge the overall health of the market and decide whether the economy is in recession or expansion. The tricky part about trying to determine the state of the economy is that most indicators are either lagging or coincidental rather than leading. When an indicator is "lagging" it means that the indicator changes only after the fact. That is, a lagging indicator can confirm that an economy is in recession, but it doesn't help much in predicting what will happen in the future. (Learn more about this in Economic Indicators To Know.)

What Does this Mean for Investors?

Understanding the business cycle doesn't matter much unless it improves portfolio returns.

What's an investor to do during recession?

Unfortunately, there is no easy answer. It really depends on your situation and what type of investor you are. (For some ideas, see Recession-Proof Your Portfolio.)

First, remember that a bear market does not mean there are no ways to make money.

Some investors take advantage of falling markets by short selling stocks. Essentially, an investor who sells short profits when a stock declines in value. Problem is, this technique has many unique pitfalls and should be used only by more experienced investors. (If you want to learn more, see the tutorial Short Selling.)

Another breed of investor uses recession much like a sale at the local department store. Referred to as value investing, this technique involves looking at a fallen stock not as a failure, but as a bargain waiting to be scooped up. Knowing that better times will eventually return in the economy, value investors use bear markets as buying sprees, picking up high-quality companies that are selling for cheap.

There is yet another type of investor who barely flinches during recession. A follower of the long-term, buy-and-hold strategy knows that short-term problems will barely be a blip on the chart when taking a 20-30 year horizon. This investor merely continues dollar-cost averaging in a bad market the same way as he or she would in a good one.

Of course, many of us don't have the luxury of a 20-year horizon. At the same time, many investors don't have the stomach for riskier techniques like short selling or the time to analyze stocks like a value investor does. The key is to understand your situation and then pick a style that works for you.

For example, if you are close to retirement, the long-term approach definitely is not for you. Instead of being at the mercy of the stock market, diversify into other assets such as bonds, the money market, real estate, etc.

Conclusion

The financial media often takes on a "sky is falling" mentality when it comes to recession. But the bottom line is that recession is a normal part of the business cycle. We can't say what the best course is for you - that's a personal decision. However, understanding both the business cycle and your individual investment style is key to surviving a recession.

by Investopedia Staff, (Contact Author Biography)

http://www.investopedia.com/articles/02/100402.asp

Leading economic indicators

To-date, all kinds of tools have been engaged by economists to forecast the economic cycle. However, the most applicable tool used so far is the "leading economic indicators" composite index.

Accordingly, if the said index rises for 3 consecutive months in a row during a recession period, it augurs that the economy will be heading for a recovery in 6 to 9 months' time.

Conversely, during an expansionary phase, should the "leading economic indicators" composite index record a fall for 3 consecutive months in a row, it is an indication that a slowdown in the economy is possible within the next 6 to 9 months' time.

US Leading Economic Indicators Composite Index comprises a wide range of components:

1. Prices for raw materials
2. The average work week
3. New orders for consumer goods
4. New orders for building permits
5. Stock prices
6. Orders for plant and equipment
7. Unemployment claims
8. Vendor performance
9. Money supply
10. Total liquid assets
11. Consumer expectations about the economy

Leading Economic Indicators Composite Index

UP -> 3 consecutive months -> economic growth
DOWN -> 3 consecutive months - > slow down/recession

Ref: Making Mistakes in the Stock Market by Wong Yee