Alternative economic indicators to watch.
During times of economic uncertainty, it helps to have some guidance before making any investment decisions. In the early days of 2020, for instance, the wide-ranging effects of a sudden pandemic caught many investors off guard. Luckily, there are plenty of economic indicators that utilize a variety of data to provide some explanation for where the market is heading. These financial signposts can offer a little clarity to an otherwise murky investing environment, though some may be more useful than others. Here are nine unconventional economic indicators that investors can use to figure out their next moves. Some should be taken with a grain of salt, while others (unorthodox though they may be) might provide some surprisingly useful information.
The hemline index.
One of the most famous semi-scientific economic indicators is also one of the oldest. Coined a few short years before the Great Depression, the "hemline index" follows a simple logic -- the higher women's hemlines go, the healthier the economy. In 2010, two economists studied it and determined that the hemline index is actually a lagging indicator, trailing markets by three years or more; and in 2012, Business Insider went so far as to measure all of the hemlines at New York Fashion Week, discovering that, compared with the year before, hemlines had risen substantially. Within three years, the S&P 500 had shot up more than 50%; in other words, academics may debate its utility, but it's possible the hemline index isn't as antiquated as it's made out to be.
The men's underwear index.
Alan Greenspan espoused several economic theories during his long tenure as Fed chair, but arguably none were as insightful as the "men's underwear index." The index is predicated on sales of men's underwear, which are usually stable across the board -- after all, underwear isn't a luxury, it's a necessity. Theoretically, men are more likely to put off purchasing new underwear, having no need for it when they can just wear their old boxers. This makes it a discretionary spending indicator; when sales slump, times are tough. While it's difficult to gauge how much guys are spending on underpants specifically right now, it's easy to believe that discretionary spending is down across the board: Fitch Ratings believes that retail discretionary spending will "decline 40%-50% in the first half of 2020."
The lipstick index.
According to Leonard Lauder -- chairman emeritus of the board of Estee Lauder (ticker: EL) -- when times are tight, women spend more on cosmetics and other small luxuries, foregoing more expensive purchases in lieu of cheaper items like lipstick, a leading indicator of a recession. Lauder coined the so-called "lipstick index" in 2001. At the time, it seemed like a plausible explanation for why sales of lipstick at his company were climbing even as overall consumer spending was dropping. This so-called economic indicator isn't of much use in 2020; with cosmetic stores shuttered as non-essential businesses and women likely to care less about appearance during quarantine, normal economic conditions simply don't apply.
The Big Mac index.
Contrived by The Economist in 1986, the "Big Mac index" is an actual honest-to-god index that measures international purchasing power parity via a hamburger. But not just any hamburger -- with more than 38,000 locations in 119 countries, McDonald's Corp.'s (MCD) ubiquitous Big Mac is the perfect vehicle to measure how far a dollar (or any other legal currency) will go. In other words, if a Big Mac costs $5.67 in the U.S. -- as it did in January 2020 -- but costs $2.15 in South Africa, that's a sign that the South African rand is undervalued (or cheaper) compared with the U.S. dollar. While The Economist itself has stated the Big Mac index should be taken with a grain of salt, it has still become a colloquial way of gauging purchasing power around the world and has spawned knockoffs like the KFC index and the Starbucks (SBUX) index.
The recession index.
While the Big Mac Index may be The Economist's most famous tongue-in-cheek index, it came up with another one in 2002 that might be quite applicable today: the "recession index," aka the "R-word index." The idea behind it is to count the number of articles in The New York Times and The Washington Post in which the word "recession" appears. The higher the number, the more likely a recession is on its way. It's a simple methodology, yet it has turned out to be surprisingly accurate and correctly predicted recessions in 1981 and 2001. In the case of 2020, it seems extremely likely that enough articles have appeared with the word "recession" in them that this index will continue its hot streak.
The cardboard box index.
The name "cardboard box index" says it all: The more cardboard boxes being produced, the better the economy will perform. Given how many items are shipped inside cardboard boxes, it makes sense that demand for cardboard boxes indicates consumer demand for online goods, which will, in turn, predict a rise or decline in spending. Investors can take a look at the index for themselves on the Federal Reserve of St. Louis' website. That said, considering how many people are locked inside their homes right now and depending on retailers like Amazon.com (AMZN) to ship items via cardboard box, it's a safe guess that this index will continue to trend upward, even if overall consumer spending declines.
The Christmas price index.
While the rest of these economic indicators measure one or two things at a time, PNC Bank's (PNC) "Christmas price index" measures twelve things at once: Specifically, it focuses on the items found in the lyrics of "The Twelve Days of Christmas." PNC traditionally prices the items on the list from December 25 to January 5, turning to Petco for the price of canaries, Gordon's Jewelers for the cost of golden rings and the Cincinnati Zoo for rates on partridges, turtle doves and french hens. Despite the seasonal nature of this index, it has still revealed interesting trends over the years, including fluctuations in the price of commodities like gold and an overall increase in labor prices.
The champagne index.
From winning a sports championship to getting married, champagne has long been the drink of choice for celebrations. Popping bottles makes sense when times are good, but people typically feel less celebratory when times are tight. Back in the 1980s, economists began to make a connection between the fizzy drink and a strong economy. And as it turns out, the "champagne index" is a shockingly accurate indicator of how the economy is performing. For instance, shipments of champagne to the U.S. reached 23.1 million bottles in 2006. Then the recession hit, and shipments plummeted to 12.5 million bottles by 2009. While changing drinking habits and the rise of sparkling wine may be to blame for a slight decline in champagne shipments in 2019, the decline still preceded a brutal first quarter in 2020.
The RV index.
Consumers tend to spend more money when they're confident the economy is healthy, splurging on luxury items when they've got the money. If they're uncertain about the future, they typically put off the big-ticket purchases. That's the theory behind the "RV index," which measures sales of recreational vehicles. Considering an RV can run from $10,000 to more than $200,000, it makes sense that a potential mobile-home buyer might delay a purchase until they feel they are on a more stable financial footing. Declines in RV sales in 1989, 2000 and 2006 all came shortly before subsequent recessions. While few economic indicators predicted what was to come in 2020, the ever-reliable RV index showed a decline in RV sales in 2018 and 2019.
Nine obscure economic indicators to follow:
-- The hemline index.
-- The men's underwear index.
-- The lipstick index.
-- The Big Mac index.
-- The recession index.
-- The cardboard box index.
-- The Christmas price index.
-- The champagne index.
-- The RV index.
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