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Economics

Economic factors that influence the stock market:

Interest rates

  • Higher interest rates make borrowing money more expensive, which reduces firm profit margins. Stock prices are expected to decrease with decreased profitability. An interest rate reduction, which makes it less expensive to borrow money, frequently gives the economy a boost when things are tough and stock values are falling.

Inflation and deflation

  • Everything becomes more expensive when there is inflation, or upward price pressure. High inflation reduces purchasing power to the point that worries that businesses may hoard cash arise. Deflation, on the other hand, is regarded as being just as serious a concern. Although decreasing prices provide consumers more purchasing power, deflation is actually regarded as a major indicator of impending economic problems. It's thought to be ideal to have some inflation, but not too much. The Federal Reserve's primary responsibility is to utilize interest rates as a tool to control inflation within "manageable" bounds.

GDP

  • Gross domestic product, also known as GDP
  • Stock prices often benefit when the GDP reading is higher because increased economic activity inspires optimism. The consequent rise in spending and sales brought on by the optimism has continued to raise GDP. On the other hand, a GDP result that is lower than anticipated may be a sign of things to come.

Unemployment

  • It's crucial to understand that unemployment is a lagging sign for stocks when considering it. As a result, it's frequently taken as a sign that something is wrong with the economy already. By the time the unemployment rate declines, economic conditions have probably changed. The stock market may suffer, though, if the unemployment rate is higher than anticipated when it is released.

Trade wars

  • Tariffs and trade conflicts increase costs for American businesses. On the goods they import from other nations, they must pay higher taxes. They must choose whether to pass the cost onto customers based on how long the tariffs are in effect. Slower economic growth and slower purchasing can result from high consumer costs. However, businesses see a decline in their profit margins as a result of not passing the costs along to customers. Even though trade wars may not have a lasting effect, they do have an impact on the economy and stock prices.
Last modified 8mo ago