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Economic indicators: Bellwether companies
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STEVE CHIOTAKIS: Farm equipment maker John Deere is set to tell us how the company’s doing in this economy.
But as Marketplace’s Adriene Hill reports, a bellweather like John Deere can tell us just as much about the economy as a whole.
ADRIENE HILL: The word bellwether comes from the practice of putting a bell on the sheep that leads the flock.
The bell helps the herder knows where the flock is and where it’s going. Bellwether companies are like that lead sheep.
David Kotok is the chief investment officer from Cumberland Advisors.
DAVID KOTOK: Markets look to them for guidance on how the entire industry is doing.
Earnings reports are the bells, often buried in the numbers are tid-bits of information about where things are headed. Chris Low is chief economist with FTN financial in New York.
CHRIS LOW: We can develop a sense of where the momentum is, and that is extraordinarily useful when trying to figure out the economy especially when it is as rough as it is right now.
Low says some companies, like John Deere, are good indicators of specific parts of the economy. Deere sells farm equipment. So if agriculture is doing well, Deere is likely doing well. But its earnings may not tell us much about other parts of the economy. Low’s favorite broad bellwethers: UPS and FedEx.
LOW: Anytime global shipping is picking up, that’s a really good indication that global economic activity is picking up.
But be careful. If you’re going to watch earnings reports for clues about the economy as a whole you’ve got to stay alert.
CHARLES TRZCINKA: Everything changes.
Charles Trzcinka teaches finance at Indiana University’s Kelly School of Business.
TRZCINKA: The companies that you think are important now may not be important in the future.
Take Microsoft. Trzcinka says it would have been considered a bellwether at one time, but not any more. The trick with using earnings reports as economic indicators is to make sure you’re following the right bells from the companies and sectors that are actually doing the leading.
I’m Adriene Hill for Marketplace.