What is a Bellwether?

A bellwether, often misspelled as bellweather, refers to an indicator or event which displays the likely presence of a trend. The performance of specific stocks/companies and bonds are seen by analysts to depict the condition of the financial markets and economy because their performance correlated greatly with a trend. Bellwether companies are always there market leaders in their various sectors. This word is a fusion of "bell" and "wether." Often shepherds hang bells around the necks of the sheep leading the flock so as to ascertain their location in the fields.

How Does a Bellwether Work?

A bellwether stock refers to a stock that's utilized in gauging the market's performance generally. A bellwether stock's status as a bellwether status might change eventually, but in the equities market, the biggest, well-established companies in an industry are usually the bellwethers. Usually, stable and profitable, the majority of bellwether stocks have proven themselves in an industry having established a customer base, as well as, unwavering brand loyalty. Some have shown resistance to economic meltdowns. Furthermore, these stocks form the bases of most major market indices; large-cap bellwethers dominate the S&P 500, the Dow Jones Industrials, and the NASDAQ. While bellwether stocks might indicate future developments, they aren't usually the sector's best investments. Immediately a company attains the bellwether status, its growth days of market-beating are always well behind it and its massive size makes significant expansion complex. Instead, investors might utilize bellwether stocks as indicators while in reality, investing their money in up-and-coming stocks, with high growth potential ahead of them, which they feel can be the bellwethers of the future.

Examples of Bellwethers

For years, General Motors was an instance of a bellwether stock, thus the quote, "What's good for GM is good for America." The company's quarterly financial results have long been considered a bellwether. FedEx is considered a bellwether for the economy as well. Strong earnings and revenues for FedEx imply strong business shipping and consumer activity, which ebbs and flows with the economy's strength. Shipping and rail stocks, according to history have been favorable bellwethers to the United States economy. Also, an alarming decrease in available stellar might hint economic recovery, since steel is utilized in manufacturing, as well as, building. Similarly, Alcoa Aluminum is a bellwether in that it functions in a cyclical industry, and huge earnings suggest a strong overall economy. Furthermore, Alcoa always tops the major companies in reporting its quarterly earnings, and its report is termed a bellwether for the corporate earnings season.