What Is a Sweet Spot?

A sweet spot is the point at which an indicator or policy provides the optimal balance of costs and benefits. This term is often used to refer to situations where economic data, such as interest rates or employment numbers, are expected to lead to the best overall economic situation.

Key Takeaways

  • A sweet spot refers to an optimal level of some reading or process.
  • In economics, the sweet spot can indicate an equilibrium level or point where costs and benefits equally balance one another.
  • Finding the sweet spot is often difficult in practice and may only be realized in hindsight.

Understanding the Sweet Spot

Interest rates can be considered to be in a sweet spot if they keep inflationary pressures in check, but don't do so at the cost of the overall market. Similarly, when the current level of employment in an economy is enough to stimulate economic growth without leading to higher levels of inflation through wage pressures, this can also be referred to as a sweet spot. The sweet spot for an economy is somewhat subjective and there is no official balance of jobs to inflation or interest to growth.

In various types of trading, the sweet spot is used to informally refer to ideal entry and exit points based on chart formations or other indicators. The sweet spot on a head and shoulders formation, for example, would be a short position entered near the top of the second shoulder after the pattern was confirmed. Although this isn't the maximum profitability point, there is a higher probability of a successful trade as the reversal is confirmed. Almost every indicator or chart formation has a commonly used sweet spot that acts as a trade trigger.

A Sweet Spot in the Global Economy

One of the perceived signs that the economy has hit a sweet spot is the growth of the middle class. The world has gone through two great expansions of the middle class since 1800, and current times are looking to be the third. In the 19th century, the Industrial Revolution created an economic sweet spot that gave rise to a substantial middle class in Western Europe and the United States. Another period of middle-class growth occurred after World War II, once again in Europe and North America and also in Japan.

Today’s expansion is happening around the world. In China alone, analysts estimate that 550 million people will have entered the middle class by 2020—more than the total population of the European Union or the United States. Over the next two decades, experts estimate that the middle class will expand by another three billion people, coming almost exclusively from the emerging world. So even though a particular national economy is not in a sweet spot, the global picture is in a (hopefully) prolonged sweet spot in terms of middle-class expansion.