Economic Factors That Influence The Stock Market

0
1954
Source- capitalaim.com

There are numerous economic indicators, which affect the movement of the stock markets. Lets learn about them below:

1. EMPLOYMENT RATE:

It is one of the most important economic indicators. If there is robust job creation in the market, it implies that there would be an overall increase in the income. More income leads to more expenditure, which in turn leads to higher profits. When there is more of surplus money, people tend to invest more, hence the stock market tends to be bullish when there is an increase in the employment rate.

2. CONSUMER CONFIDENCE INDEX:

Consumer Confidence Index (CCI) reflects the degree of optimism of people like you and me on the state of the economy. CCI is a combination of two indices- Present Situation’s Index (consumer’s attitude about current situation) and Expectations Index (how consumers feel that conditions will change in the next 6 months). Higher the CCI, means that are consumers are optimistic, which in turn leads to increased spending and investing as well. Thus, a higher CCI is positive for Stock market.

3. GROSS DOMESTIC PRODUCT (GDP):

GDP in short is the total price tag of all goods and services made in the economy. If the GDP is better than expected, it implies that there is a raise in the income of the households. An increase in the income leads to higher investment an hence more investment in the stock market also.

4. INDUSTRIAL PRODUCTION AND CAPACITY       UTILISATION:

Industrial Production Rate is percentage change in quantity of goods produced and Capacity Utilisation Rate is the slack rate in the economy (For example- maximum capacity of a plant is 500 units but it is currently producing 350 units, this implies a Capacity Utilisation Rate of 70%). When there is an increase in the Capacity Utilisation Rate, it means that the economy is vibrant and there is more production and consumption, leading to higher income and hence, higher investment in the stock market.

5. CONSUMER PRICE INDEX:

It is a measure of inflation in price of retail goods and services. A higher CPI reflects inflation in the economy. When there is inflation, there would be an increase in the interest rate charged by banks. Higher interest rate means that there would be lesser money in the hands of the companies and public to spend/invest. A lower capacity to invest in the stock market leads to bearish prices.

6. HOUSING STARTS REPORT:

A housing indicator is one of the most reliable indicator of economy and hence equity market. Real estate is one of the first sectors to shut down when economy nears a recession. The real estate sectors contributes 5% of the GDP and is so far ahead of other indicators due to its sensitivity to interest rates. When the economy is over heated, Central Banks tend to increase short-term interest rates to curb economic activity, which leads to a rise in the mortgage rate, this further leads to a fall in demand for homes and finally the amount of construction goes down. When there is a fall in construction, multiple industries are hit. Demand for steel, wood, cement, bricks, plastic, glass, wiring, piping goes down. Even purchases of electronics, furniture and appliances go down. Slowing economic growth is a bad indicator for stock investors because it indicates a downturn for the overall economy.

Author | Akanksha Goel