What is a Bellwether Stock?

A bellwether stock is a stock which tends to lead the sector that it is in, along with the market as a whole. In some parts of the world, these stocks are known as “barometer stocks.” Bellwether stocks tend to be respected blue chip stocks which command a large share of the market, and stock market analysts tend to keep a close eye on them, since they can be indicators of events to come. By being aware of common bellwether stocks, people can make more sound investments based on historical market trends.

The term “bellwether” has its origins in the Middle English word bellewether, which refers to a sheep which leads the rest of the flock, using a bell to attract the attention of the other sheep. Traditionally, the leader sheep was a wether, or castrated ram. Over time, people began to use the term more generally to refer to any sort of leader or indicator. It may interest you to know that in a flock of animals which all wear bells, the bells are often tuned together so that the sound of the flock in motion is pleasing to the ear.

One classic example of a bellwether stock is General Motors in the United States. This stock acts as a bellwether for the automobile industry, but it also influences a number of other markets as well, due the position that it holds. General Motors buys from a wide number of suppliers in a range of industries, for example, so when the company struggles financially, it has a ripple effect.

In turn, General Motors sells to private consumers, other companies, cities, fleets, and so forth, meaning that fluctuations among these buyers can also influence the company's success. Oil prices, for example, might lead to a reduction in the number of General Motors vehicles produced, which would in turn impact the company's suppliers, leading the market to take a downturn. Therefore, fluctuations in the price of General Motors stock might indicate coming financial trends.

Another well known bellwether stock is Intel, a major player in the technology sector. Intel is also considered a blue chip stock, meaning that it is a reliable, sound investment opportunity with the potential for high return. Some market analysts may be heard to say “as goes [bellwether stock], so goes the nation,” in a reference to the huge influence that these companies have on economic health. Others say “what's good for [bellwether stock] is good for the country.”