Analyzing the effects of last week's important indicators on ETFs

Analyzing the effects of last week's important indicators on ETFs (Part 1 of 10)

Why last week’s Chicago Fed National Activity Index was negative

Chicago Fed National Activity Index

Bearish sentiment continued to prevail in the U.S., as another round of key market-moving indicators declined at the beginning of last week. The 85 economic indicators in the Chicago Fed National Activity Index or CFNAI fell sharply to -0.39 from a revised -0.03 in December. Early readings on the current month private service sector indicated softness, with a decline in the Markit Services Purchasing Managers’ Flash Index, or PMI, to 52.7 from 56.7 in January.

CFNAIEnlarge Graph

The CFNAI is a monthly index designed to better gauge overall economic activity and inflationary pressure. Released toward the end of each calendar month, the index is a weighted average of 85 existing monthly indicators of national economic activity. It’s constructed to have an average value of zero and a standard deviation of one.

The index highly correlates with the overall change in the U.S. economic conditions. When the economy tends to move in an upward trend, the index shows a positive reading, which corresponds to growth above trend. A negative reading corresponds to growth below trend.

Though CFNAI is closely watched among market analysts, the effect is more regional, so it doesn’t pose a greater threat to the overall economy when declining in the short run. However, a consistent decline in the index will have a negative connotation for the economy in the long run. This in turn leads to volatility in the stock and bond market.

Another major indicator on which markets reacts sharply is the retail sales index. The index is also a barometer to gauge the consumer spending level. A decline in spending suggests bearish investor sentiments on economic growth, while the opposite holds true for an increase in consumer spending.

A decline in consumer spending can largely impact the top line of many leading retailers, including Wal-Mart (WMT), Target Corporation (TGT), and Costco Wholesale (COST).

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