When you hear business news, benchmark indices like the Dow Jones Industrial Average and S&P 500 are usually mentioned as economic indicators for what happened on the stock market.
For example, the Dow Jones Industrial Average comprises 30 different companies that trade on the New York Stock Exchange (NYSE) or the NASDAQ. When investors hear “Dow Jones edges higher today,” it simply means that, on average, the companies which constitute the index showed a price increase.
Benchmark indices contain stocks from different industries and provide a gauge of the overall market sentiment.
That said, the Dow Jones Industrial Average and the S&P 500 are not the only benchmark indices—there are many more, including the NASDAQ Composite Index, Russell 2000, S&P Midcap Index, and the NYSE Composite Index.
No matter which stock market index an investor looks at, it is bound to contain stocks from different industries. Within each index are benchmark stocks—companies that are leading indicators for both their respective industries and the economy in general.
How is it possible that one benchmark stock can gauge the national and global economy? Some of the benchmark stocks sell a great amount of products or services to consumers and businesses, and based on the earnings growth or contractions of these companies, analysts often get an idea about the health of the economy.
For example, Wal-Mart Stores, Inc. (NYSE/WMT), the world’s biggest retailer, is often referred to as a benchmark stock for retail sales. If profits and revenue at Wal-Mart are strong, consumer retail sales can be construed as healthy. At the same time, weak or strong Wal-Mart revenues point to how much discretionary income the average American has and their spending patterns. When consumers are buying goods from cheaper retailers, diverting sales from more expensive retailers, it means that they are hoping to save money.
Similarly, General Electric Company (NYSE/GE), which is really a portfolio of large diversified corporations, is also a benchmark stock and reflects general business sentiment. If General Electric (GE) is reporting strong earnings and sales, it means business activity is strong. In addition, it also suggests that customers aren’t as price-sensitive, and are more willing to spend money.
Another benchmark stock is Nucor Corporation (NYSE/NUE). The company manufactures and sells steel products around the world. If the company reports higher revenue growth and increasing profits, it means manufacturing and construction is picking up.
Another one of the benchmark stocks that Profit Confidential follows is Union Pacific Corporation (NYSE/UNP). Following this company is a great way to get a feel for the industrial economy. Union Pacific is the market leader among the railroads, which are also a key indicator for the stock market.
Following benchmark stocks is a great way to focus your stock market view. With benchmark stocks, you can look beyond the headlines and get a solid feel for how a business and industry is doing. Following benchmark stocks helps provide clarity through all the noise.
As the editors at Profit Confidential, we spend a significant amount of time researching benchmark stocks, and how they reflect both domestic and global economic sentiment. We regularly guide our readers and provide regular commentary on these benchmark stocks.