Sniffing out the Impact of Your Investment Environment

The Anatomy of Investing, written by Dean Junkans, the chief investment officer for Wells Fargo Private Bank, is an easy-to-understand journey through the ins and outs of accumulating, organizing, and keeping one’s wealth. There’s never a dull moment as Junkans gives gun-shy investors a strong dose of common sense investing tips without any scheme-of-the-moment stuff.

—Tony Carideo

Chapter 7: The Nose: Sniffing out the impact of your investment environment.

The economy can also offer you investment opportunities, but your nose will have to be calibrated to separate the false smells from the real ones. If you want to simplify your analysis of the economy, divide it into four sectors: consumer, business, government, and prices and valuation.

There is an abundance of data gathered and reported on just about every week on each of these sectors. Most of it you should ignore. Why? Read on.

Garbage and Opportunities

In the consumer sector it’s all about jobs. If consumers have jobs they will spend money and the consumer sector will likely be in good shape. Look at the unemployment rate. If it is below 5 percent, the economy is experiencing full employment. What this means is that most everyone who wants a job can find one, and that represents a good environment for the consumer part of the economy. Strategists, economists, and the financial media look at and report on a whole host of other data on the consumer, but most of it is noise and not worth your time analyzing.

In the business sector, it is not as simple. There are two key indicators you should look at. The first one is earnings growth. Are companies growing their earnings at a reasonable pace—generally above 10 percent annually is a constructive environment. The second indicator to look at is revenue growth. Are companies growing their revenue, also referred to as their top-line growth (in contrast to the bottom-line, which represents earnings growth), by at least 7 percent annually?