In April, reflecting on the first quarter results of 2009, I wrote about the U.S. stock market being a leading economic indicator and how it tends to anticipate the direction of the U.S. economy. “Perhaps this recent rally is the real thing, indicating a recovery; then again, only time will tell if we are truly out of the woods. It is important to remember that when the financial media announces the end of the recession, the stock market already will have anticipated that fact. The market already will have the recovery priced into it.”

Because we can’t predict how the markets will respond, it’s important to maintain a balanced investment approach that focuses on short-term stability and long-term growth.

Another type of economic indicator is a lagging economic indicator, which signals the end of an economic cycle rather than anticipating the beginning of a new one. As an investor, a leading indicator is more valuable than a lagging indicator. However, the lagging indicator is a data point to confirm a long-term trend. A good example of a lagging economic indicator is the unemployment rate. The unemployment rate will continue to rise and will not peak until two or three quarters after the economy has started to improve.

So as you watch the news headlines and listen to the media discuss the unemployment rate and job creation or losses, it is important to listen to this information in the right context. Keep the economic news in the right perspective. The economy will be well on its way to a recovery by the time we see the unemployment rate drop from its peak.

I welcome your thoughts and feedback. Email me at PEng@MoneyAZ.com or call 602-281-4357.