Trying To Understand The Stock Market Changes Based On Economic Factors


I may be no economic genius or anything but trying to learn the fundamentals of economics. Now it's time to look at some of them. I just decided to analyze fromGet Smarter About Moneyto know some of these factors that affect the stock market.

1.) Interest rates

From what I see, interest rates do affect the stock market. If interest rates are high, that means there is less borrowing since wise business decisions say you DO NOT borrow at a high interest rate. If you are charged with higher interest, it can really affect your profits because you will be charged higher interest. Interest is the charge for borrowing money. It's beneficial to the lender like bank depositors but it is a downside for the debtor. You may earn more money as a depositor and it may be the best time to sell but not the best time to buy. Higher interest rates means share prices may drop soon for buying.

2.) Economic outlook

This is based on expanding and contracting. In the face of expansion, demand will increase and if supply for stocks cannot be met, In the middle, I assume that in an expending economy, stock buying starts when the prices aren't high yet but later, it will rise because there will be too many buyers. Once the expansion reaches its limits, it's time to contract and it would be time to sell them when the prices are high.

3.) Inflation and deflation

When inflation happens, prices increase which slow sales and in turn, decreases profits where higher prices lead to higher interest rates. When you think of it, your interest rate increases as the amount of money you loan in increases. During the time of deflation, prices decrease meaning there will be lower profits (ex. a moveout sale does not yield that much profit) resulting to decrease in economic activity. It would be the best time to sell stocks and invest in other forms of investments to fixed income investments like bonds.

4.) Economic and political situations

Changes within the country and around the world can affect the stock market performance. Aside from hitting the peak and it's time to go down, you can consider the more obvious reasons like wars, too much economic restrictions (supply and demand, example having high Internet cost and electrical cost can lower sales, lower profits in exchange lower stock prices in spite of selling a higher price because supply will be too low and demand may be too high), economic liberalization (which may lower down the costs of utilities allowing cheaper production to sell at a lower cost at a profit) and political conflict (ex. China's bullying vs. neighboring countries like Taiwan and the Philippines).

5.) Changes in economic policies

Economic policies can be for the good or for the bad. Remember too much of either competition or restriction is bad for your economy. For example, you do not just accept investors for investing sake or that in giving economic restrictions, you should be reasonable enough as not to discourage foreign investment which in turn may affect jobs as well as the supply and demand cycle. This in turn may affect inflation or interest rates and supply and demand hits. For example, when there are more investors it may also mean higher supply and higher demand. Higher supply because investors may produce raw materials but higher demand if the investors were manufacturers and the Philippines cannot supply to them all so either you have to restrict or you have to ease down, one cannot do without the other.

6.) Appreciation and depreciation of local currency

Currency devaluation is part of life and it's a necessary force in the economic market. When the currency devalues, you can expect a spiral but it also means becoming more competitive in terms of prices with the international market. Like China for example due to its cheap labor, foreign investment can sell their genuine products when produced in China, they can sell a quality product at a lower price. When the currency appreciates, it allows more import power but it can also reduce export as the products of that country will look pricey and first class to the parts of the world with lower income. Appreciation may decrease stock prices (due to decrease in export) and depreciation may increase it (due to an increase of sales).

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