What is a Barometer Stock
A barometer stock, or bellwether stock, is a security whose performance is considered to be an indicator of the performance of its particular sector or industry, or the market as a whole.
BREAKING DOWN Barometer Stock
Barometer stocks are more commonly known as bellwether stocks in the U.S. market. These stocks act as a gauge for the overall market or sector. Analysts often look to barometer stocks to predict the direction in which an industry or market is likely to be headed in the short term.
Barometer stocks are usually large-cap equities or respected blue-chip stocks that signal a bullish market during periods of favorable performance and during periods of unfavorable performance signal a bearish market. Many different types of securities can be classified as barometers; however, in the United States, the shipping and rail stocks have historically proven to be good indicators for the U.S. economy and, as such, make good bellwethers. Barometer stocks can have a large influence on the economic health of the country. Market analysts sometimes say something to the effect of, "What's good for [barometer stock] is good for the country."
While barometer stocks may indicate favorable performance, they are not always the best investments in a particular sector, because a company’s rise to barometer status indicates that its growth days are long over. Being as large as these companies are makes meaningful expansion unlikely. However, while investors would do well to invest their money into up-and-coming stocks, they may use barometer stocks as models for determining which of the up-and-coming stocks seems likely to be a barometer stock in the future.
Examples of Barometer Stocks
Alcoa Aluminum is considered a barometer for the economy because it operates in a cyclical industry. So if the company reports strong earnings, that suggest the economy is strong. Alcoa Aluminum is the first major company to report quarterly earnings, and its report is considered a barometer for corporate earnings season.
General Electric’s quarterly results are also considered to be a barometer, as are those of FedEx. Accordingly, strong revenues and earnings for FedEx correlate with healthy shipping activity by consumers and businesses alike. This activity can ebb and flow, depending on the state of the economy.
Caterpillar has often been viewed as a barometer for both the domestic economy and the global economy, with global sales of its construction equipment signaling global economic health.
Alphabet, the parent company of Google, is considered a barometer of tech-sector performance by some analysts.