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For many years traders have sought the answer to this question. If there was a simple all embracing answer, then surely the Holy Grail would have been found, and trading would be a sure thing. As you may suspect, there are no universal truths in the impact of economic news on the markets, but there are areas of cautious advice in the light of clear evidence that there are effects.

Firstly, it is plainly evident that markets can be influenced by events, including simple calendar events such as the end of the year, or the so-called Halloween Strategy which identifies that most capital gains occur between October 31 and May 1, and suggests that this is the best time to be invested in the market. Volatile stocks are particularly likely to be dangerous to hold over the summer period.

Secondly, although it may seem obvious which direction the prices will move for certain news, you should realize from your trading education that the market does not do what it “ought to do”, and sometimes the prices go in the opposite direction. Your trading strategy should allow for this, and be based more on historic movements than “commonsense”, with suitable stops to guard against the wrong direction.

All economic reports are not created equal, and not surprisingly some of the news has a bigger effect on the market than others. This has been analyzed, and the most important economic indicators are the employment report, the retail sales report, and the National Association of Purchasing Managers (NAPM) report.

The first two you may be familiar with, but the third seems to get less publicity. It is published on the first business day of the month for the preceding month, and is a survey of purchasing managers which covers a whole range of factors, such as new orders, production, employment, deliveries, and inventories. Interestingly, in a recession the bottom of the NAPM index precedes the turnaround by an average of four months.

The employment report usually follows this, as it is published on the first Friday of the month, and includes such factors as hours worked, breakdown of the labor workforce, etc. This report gives a strong insight into the direction of the economy. From the other side, the retail sales report reveals consumer spending patterns, and comes out on the 13th of the month.

The Consumer Price Index (CPI) comes out about the same time as the retail sales, and is nearly as significant in terms of its effect on the markets. This is sometimes looked at as the “rate of inflation”, though it has been subject to considerable manipulation over the years. More relevant to track long-term trends is the core or underlying CPI, which excludes more volatile items such as food.

Finally, the best indicator of true wage growth is the Employment Cost Index (ECI), even though it is only published quarterly. It is the equivalent to the CPI, as it relies on a fixed set of occupations, and is not affected by changes in type of work or amount of overtime worked.

Each day there are many economic indicators published, but if you focus on those mentioned above, you will have the best indication of the state of the economy and hence the state of the markets.