Predicting a stock market trend is not an easy task; some say, the stock market runs on investors’ sentiments while some traders deny the fact. However, this is not the case. Of course, investors’ sentiments affect the stock market to a greater extent but some economic factors play a crucial role in identifying the prediction of the stock market.
To begin with, economic news may heavily impact the stock market as the economy goes up, and so too grows the stock’s profitability. Top companies whose shares are currently trending at the top in the stock market mostly rely on a strong economic environment. As the economy grows, many investors look forward to buying products and services, which in turn increases stock prices.
On the contrary, when the economy struggles, people start to avoid spending on products that may heavily impact a company’s stock and as a result, the stock market experiences a strong decline.
Fundamental analysis of stocks helps investors to identify the real worth of stock, technical analysis, on the other hand, provides a detailed insight into stock and tries to capture the market’s psychology.
Some of the economic factors are inflation, the country's GDP, unemployment, retail sales and more. The majority of these factors affect the stock's performance. If investors are completely aware of these factors, they can upgrade their portfolio to minimize their losses.
Economic Factors that Influence Stock Market Growth
Let’s look at the economic factors that directly influence stock market growth:
1. Gross Domestic Product or GDP
This is one of the biggest economic factors which directly impacts the country’s economy. Gross domestic product is the final value of goods and services produced in a country during a specific period of time. It tells the overall economic performance of a country. Usually, GDP is calculated on an annual basis while sometimes it is measured quarterly.
In many countries such as the US, the government yearly releases GDP reports along with the annualized GDP for each fiscal quarter. In simple terms, GDP is a measure of economic growth which tells the overall health of the country.
If the GDP of any country performs well, investors buy shares hoping that the stocks will provide them outstanding returns. However, if the GDP is contracting, the profitability of the companies tend to decrease as the investors start to avoid purchasing stocks which in turn cause a significant drop in the stock market.
The upliftment of GDP encourages investors to purchase more stocks as they are optimistic about the earnings of the stock market.
2. Unemployment
Wages gives a clear report on the economy. For instance, consumer spending automatically drops whenever the unemployment rate is high. As the funds are limited, people show less interest in buying; they spend less amount on secondary items and allocate funds only to needy items.
This may reduce the earning capacity of the companies which highly affects the stock market prices.
Conversely, if the employment rates are rising and vice versa, then the market condition forces investors to buy more stocks which makes a positive impact on the stock market.
3. Inflation Rate
GDP and inflation are the two factors that affect the stock market as it impacts overall consumer spending. Inflation, in general terms, is defined as the rising price of goods and services within a particular economy. It means the price of goods and services is continuously rising which decreases the purchasing power of consumers.
Rising costs may heavily impact business and their profits as no investors are ready to purchase the stocks of these companies which suffer businesses a lot. Hence, when the inflation rate rises, the stock market falls very badly.
Rising inflation makes investors hedge their portfolio as rising inflation increases the volatility of the stock market.
4. Interest Rates
Needless to say, high-interest rates negatively affect the stock market as rising interest rates limit the borrowing capital for the businesses which in turn hamper the growth of the business. This can heavily impact business growth, potential earnings and stock prices.
Rising interest rates also form a great impact on consumers. This is because rising interest rates affect the mortgage interest payments which decrease the purchasing power of the consumers.
5. Exchange Rates
Exchange rates are also an important factor that influences the US stock market. A weak exchange rate signifies cheaper export rates internationally. This is good for those companies who regularly export goods and services. A high exchange rate is directly related to cheaper imports, hence it is apt for companies who use imported goods such as manufacturing goods.
Takeaway
Understanding the macroeconomic indicators and setting your portfolio according to them is the hallmark of any investor. It is seen that many investors get easily influenced by so-called analytical reports without going through it. For a successful investor, it is important to invest some time in understanding the microeconomic factors of a country before investing.
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