There are many economic factors that have a large effect on the stock market, making traders react quickly and force them to readapt to new conditions in the market. If you understand what causes the market to shift, then you can profit more often. At www.abovethegreenline.com, we help investors remain informed of the market so they can make wiser investing decisions. Here are 4 different ways that varying factors in the economy can cause the prices of stocks to fluctuate and why you should care regardless of your investing style.
Why this should matter to you
Some traders might think that economic news and global reports are interesting, but regardless of your personal interest in the material, there are a lot of reasons why long and short-term traders alike should be watching the news for its impact on the stock market.
Mainly, the better you understand the economy, the greater the odds that you are to succeed as a stock trader. Economic factors are often the greatest drivers of the shifts in the stock market, with no regard for sectors or the whole thing. If you can recognize what is happening in the economy and be able to identify the direction in which it is going to shift the market, then you can readapt to not only mitigate your financial damage, but also even profit.
Day traders, though they don’t retain their positions overnight, should also be paying attention. Sometimes the market waits in suspense for companies that are about to make major announcements concerning job growth, wage growth, or even interest rates can cause their value to skyrocket or be quickly devalued throughout the day.
The interest rate
Interest rates are one of the most valuable sets of data across the whole economy, including the stock market. Interest rates are determined by the Federal Reserve as a strategy to change the price of borrowing money and simultaneously ensure that currency inflation stays in the middle of the preferred rate.
Change in interest rates affect the economy in many different ways. When they are high, it is more expensive to borrow money – which could cause consumers to think again about buying a house or a car or to used the borrowed money to hire more people or purchase new tools. However, low interest rates make it easier for the economy to grow.
It might be unsurprising, that the interest rate can have a great impact in the stock market since stock values are linked to the profitability of the company to which they belong. Said profitability could be held back when the rates are higher and the consumers and business are spending less money.
Traders should always pay attention to interest rates by looking for announcements from the Federal Reserve. Typically, the Federal Reserve gives a few days’ notice of an upcoming announcement, and is when rumors of changes will begin flying around.
Inflation is the rate that a currency devalues every year. As an example, an inflation rate of 1% would mean that $100 today will only have the buying power of $99 next year. While economists have trouble identifying the exact reasons for inflation, raising the interest rate is one of the most impactful methods the Federal Reserve has to keep inflation rates from going too high.
Like the interest rate, inflation rates also have a lot of effects on the economy. Too low interest rates can cause consumers to have less confidence which can hurt the profitability of businesses, but if they are too high, then it can cause them to prefer to save their money and not spend it with businesses. High inflations is mainly bad for business since it results in the devaluation of financial gain.
The stock market often sees some smaller changes in inflation rates, therefore not every announcement regarding inflation rates will cause a notable market change provided that it is according to expectations. However, inflation announcements are generally bad for the market, both during the day and possibly over a period of weeks or even longer, if they are much greater than investors expect.
Politics, both at home and afar, can have a big influence on the stock market.
With politics occurring in the United States, this kind of impact in the stock market can be seen when there is a high-level election such as for the presidency or mid-terms. Generally, investors will see one candidate as being better for large corporations because of their stances on policies and increasing profits or ensuring that the overall economy is going to allow the growth they want to see from those companies. Drastic spikes in value for different companies is common during this time.
The United States recent trade war with China is another example of how international politics can impact the stock market. Uncertainty in the outcome of any major negotiation where other markets are concerned cause cause more trepidation among investors and sometimes emotional placements and retractions of investments. Even when considering it more logically, tariffs can also affect how well domestic companies can flourish in the economy.
Unlike interest rates or inflation rates, politics isn’t purely economic, which can increase the difficulty in filtering out purely political news from something that is going to have a drastic impact on the economy. The best way to follow how they will affect the stock market can often be found financial news publications.
Unemployment Rate & Jobs Reports
The interaction between unemployment rates and the stock market can be intricate. Although it might appear as if lower unemployment is a boon for the economy and must be consequent with a bullish market, it’s not always the way it works. Instead, if unemployment is low, investors may be more willing to pay high price-to-earnings ratios for different companies, which can become bearish because high valuations can result from worse than average forward returns.
We aren’t saying that high unemployment benefits the stock market, but it does generally warn that there is trouble looming in the economy and that consumers and businesses are slowing down their expenditures which hurts most corporations. Therefore, similar to inflation rates, there is a short period of time when unemployment rates will match the general consensus on the market.
Unemployment rates are normally announced every month by the United States’ Bureau of Labor Statistics in documents known as jobs reports. They can cause swings during the day, even if there is a lack of news or the jobs report is unclear in its prediction for the market in a broader sense. Also, jobs reports can either make investors hopeful or concerned which can hurt the investments that could contribute to a steadier and greater growth of corporations in the long run.
Economic Growth & Projections
Reports of growth in the economy and projections of growth in the future are a common trigger for swings during the day and lasting for multiple days. Just as corporations need to succeed in profits, both reported and projected, in their earnings reports, the announcements about economic growth will, ideally, match the expectations of investors for current growth and that for the future for it to cause a large boost in value. Although some will turn out in a way that may disappoint investors, it isn’t going to hurt too badly, historically-speaking, in a bullish market, but they can make a company volatile in a bearish one.
Similar to jobs reports, growth of the economy can be harder to understand and predict for both the economy and the stock market overall. On the other hand, the outlook of the investors is normally back to being hopeful after the release of the jobs reports a few days later. The effect can be seen during the day and last for a couple of weeks. The economic growth reports are normally released every quarter by the Bureau of Economic Analysis.
Those are 4 common reasons as to why the stock value of different corporations fluctuate in the way in which they normally do. As you study the trends and reasons behind the reaction of the market, patterns will emerge and you will be better on your way to protect your investments and profit no matter which way the market turns.