Look at economic indicators to determine investment choices

While all of us would love to be able to predict what will happen with our investments, the market reminds us that it has a mind of its own. As we look to the future, however, we can use certain guidelines to help us get at least an idea of where the market is headed. By paying attention to these indicators, we can make educated decisions on where to place our investment dollars.

One way to gauge the market and its trajectory is to be aware of the trends that are in place for both the market and the economy. It’s worth noting that even though we’re focusing on the market, we also have to consider the state of the economy. Trends for the economy, corporate earnings, inflation interest rates and a host of other factors all help control the market. Rather than trying to predict something that’s not already in play, it’s best to stick with existing trends when looking ahead.

For example, the current recession in the building industry has, in part, led to slower economic activity in recent months.

Interest rates were on the rise for two years, but the Fed halted its rate-hike cycle this past summer.

Also of note, the market has been rising overall for more than four years now, compared with a typical bull market average of approximately two years. What do these trends mean?

They indicate that the economy and the stock market should perform OK this year. That may not sound like a highly technical description, but with the information we can glean from what we know, it appears that while we’re not on pace to see a huge upward swing in the market, we probably won’t see a major decline, either. That’s important – and useful – information for planning investments.

Beyond the general market direction, as an investor, you also want to know which sectors of the market might provide favorable investment opportunities. Investors always should consider investing in sectors of the market that may be in a position to do well.

Based on the expectation for a slower-growth economic environment in the first half of 2007, market professionals currently recommend investing in the more defensive health care and consumer staples sectors.

As for current holdings if you are invested in companies that are weak in their respective industry, this could become a bigger risk when the economy slows. You may be better off buying and owning strong companies that have pricing power and dominant positions in their industries. But how can you identify these companies?

Interestingly, some of these companies may be right in front of you. Think about the products you see on the table at holiday parties or other gatherings – brands that are widely known and accepted. These companies are usually quite profitable because they have good control of pricing.

It’s always possible that their business may slow down a little with the economy, but they’re likely in a position where they won’t fall off entirely.

The hard part in making good picks is that great companies don’t always translate into great stock investments. When the market recognizes a good company, its stock price tends to move to a valuation that doesn’t offer an active risk/reward tradeoff.

In the current environment, however, you can look for – and take advantage of – opportunities to buy great companies at reasonable prices.

Timothy M. Reese is senior vice president-investments at A.G. Edwards & Sons. Inc. in Springfield. He may be reached at timothy.reese@agedwards.com.[[In-content Ad]]