Economic Factors That Can Impact the Stock Market

The stock market is an incredibly unpredictable market, at the most unexpected times it becomes volatile and vice versa. Although it is hard to perfectly time the execution of strategies, this unpredictability is also what makes the market so exciting. There are several factors that may impact the functioning of not only the stock markets but the overall global and domestic economy as well.

These factors may be – such as – political, natural, psychological (market) and economical. Thus, the resultant impact is not from one single factor but combination of all of these. These are the factors that indicate and can dictate an upcoming trend in the stocks market

So, the stock market, too, is affected by some economic factors:

Inflation and Deflation: Inflation and Deflation can highly affect the stock market. Inflation increases price pressure and the buying power is decreased. During Inflation, since the buying power is decreased, investors run away from purchasing stocks of companies and that leads to a down in the market.

Deflation, too, can negatively affect the stock market. During deflation, although the purchasing power is increased, companies face a downturn trend in their stocks and that too has a widespread effect on the market. That’s why a limited amount of inflation is considered desirable.

GDP: GDP or Gross Domestic Product has a strong effect on the stock market. A strong number of GDP can boost the confidence of investors and companies alike i.e. of the overall market as there is increased optimism about the economic output of the country as it helps stock prices.

On the other hand, if the GDP is a number lower than the expectant number, it can severely dishearten the market. A low GDP seems negative and can drive the market sentiment downwards and the stock prices may drop as well.

Trade Wars: Trade Wars between countries about different commodities severely affect the stock market. The reason behind it is that during trade wars, the expenses for domestic companies’ increases. During trade wars, companies have to pay higher taxes on products they import from foreign countries.

Sometimes trade wars last for a short duration and companies can decide to bear the extra cost themselves. Other times though, these trade wars can last for a longer duration and the companies may decide to pass the extra cost onto customers.

Increased consumer costs can slow down buying of products and in turn, slow down the economic growth. Both options make an impact on profits-margins of the company and their stocks as well.

Interest Rates: High-interest rates can make a strong impact on the stock market. High-interest rates simply mean it’s more difficult to borrow money and that can negatively affect the profit margins of the companies. Decreased profits can lead to a fall in the stock prices in the market.

Foreign Markets: The prevailing economic trend in any foreign market has a huge impact on the domestic market. If the economy of the foreign country is down, it would negatively affect the export of domestic country, which may show a downturn trend in the stock market and vice-versa.

These are some of the economic factors that can impact the stock market but the stock market is not always reliant on them. The trends in the stock market are unpredictable and the same factors may never produce similar results in the market.