The most important factors affecting the stock markets
Last Updated on March 8, 2021
Stock markets are affected by many factors, whether economic or political, which forces investors to respond quickly and react to new market changes. Understanding the types of economic and political factors that affect the market as well as how they affect the market can go a long way towards improving your profitability as a trader.
Politics and stock markets
Politicians’ decisions and statements can have a direct or indirect impact on business and thus on stock prices, for example, changing taxes on imports and exports, product subsidies, presidential elections, etc.
Political shocks and turmoil can lead to big fluctuations in stock prices, such as decisions about wars, leaks of important information, the imposition of sanctions, etc.
In general, the more stable the political situation in the country the more favorable the conditions are to invest in the stock market, because political uncertainty increases the risks related to investing which makes investors prefer to move away or withdraw their money to invest in safer markets.
Economic factors affect stock markets
The economic factors in many cases are the major drivers of the fortunes of the stock market, whether in specific sectors or across the market as a whole. The more you understand the economy, the more likely you are to succeed as a trader.
- Interest rates
Stock prices are affected by the extent to which the interest rate changes, meaning that higher interest rates indicate that money becomes more expensive to borrow to compensate for higher interest costs, and companies may have to reduce spending rates or lay off workers which will have a negative impact on corporate profits and thus stock prices will decrease.
When the inflation rate is low, the stock market responds by increasing sales, while high inflation makes investors believe that companies may reduce spending rates which leads to lower revenues in all areas, and thus the stock market will decline.
- Gross Domestic Product
GDP is a general measure of a country’s economic health, and GDP can have a significant impact on investment returns.
Gross domestic product means the total amount of services and goods produced in a particular period within a country, and includes all public and private consumption rates, government expenditures, investments, and the rate of exports minus the imports that occur within the state.
The economic health of the country affects the stock market returns greatly, and that is why any change in the gross domestic product, either up or down, will have an impact on the direction of the stock market.
- Jobs report
Another strong indicator affecting stock markets is the unemployment rate, which shows the development and strength of the economy.
The jobs report and unemployment rates are important measures of the health of the economy as a whole. Basically, the number of people with jobs equates to higher economic output, retail sales, savings, and corporate profits. As such, stocks generally rise or fall with good or bad employment reports.
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