How to get started with fundamental analysis

Fundamental analysis is the study of the economic, political, and social drivers of the financial markets. It is a crucial aspect of the financial markets as it allows investors to understand the strength of one financial asset against another, especially in the foreign exchange market. Consequently, the fundamentals affect the supply and demand of the financial assets, while depicting the state of a nation’s economic health. 

It may seem daunting to many investors, especially the ones who are new in their investing journey, because of the large amount of data and information. Hence, I outline a few starting points I teach in my mentorship program to make this an easier process for my students.

Macroeconomics

These focus on the overall health, performance, and behavior of the economy. 

Monetary policies and interest rates

Monetary policies and interest rates are key tools used by central banks to influence a nation’s money supply and economic health. These are part of the key factors that influence consumer behavior and spending in an economy. 

Geopolitical events

Geopolitical events reflect a country’s standing on a global scale and have an impact on its economy. These include:

• Wars
• Pandemics
• Government stability
• Natural disasters

Economic data reports

These reports are released weekly, monthly, quarterly, and yearly. They are used by central banks to formulate the monetary policies and by investors to anticipate the potential investment opportunities in the financial markets leading to the central bank meetings. 

Two of the main focuses of a central bank are: price stability and employment. The economic reports below help investors understand both of these focuses and the potential sentiment of a central bank.

Consumer price index and producer price index (CPI and PPI)

These reflect the inflation in an economy from a consumer and producer perspective. Consumers are the core and essential component of an economy. Consumer expenditure accounts for the majority of economic activity. Hence, central banks follow CPI and PPI data points very closely.

Personal consumption expenditures (PCE)

This is another data point that reflects inflation in consumer prices. However, it differs from CPI because it reflects the change in price for goods and services, per item, targeted towards and consumed by consumers. Hence, it provides valuable insights into consumer expenditure. This is another data point closely watched by central banks.

Non-farm payroll (NFP) and unemployment claims

Employment has a direct correlation with consumer expenditure as consumers tend to be more generous when they are employed with a steady stream of income and more conservative when they are unemployed. NFP reflects the change in the number of employed individuals, excluding the farming sector, and is released on the first Friday of every month. Hence, it has a stronger impact on the financial markets and on certain financial assets. Unemployment claims are released every Thursday and reflect the change in the number of people who file for unemployment. These data points are used together to understand the strength of the labor market; one of the key focuses of a central bank. 

While these are starting points for someone looking to strengthen their fundamental analysis, it is also important to note that these fundamentals need to be reviewed and understood in accordance to which phase of the economic cycle we are in. For example, while an increase in inflation may seem like an issue in the contractionary phase of the economy, it may be needed in the expansionary phase of the economy. As such, one must approach the financial markets holistically.