A market participant may find it insufficient to make decisions solely based on company-specific information. Understanding the events that affect the markets is also crucial. The performance of equities and markets as a whole is significantly influenced by numerous external factors, including economic and/or non-economic events. Trends allow traders and investors to make money. Profits and losses are determined by the movement of prices from one to another, whether on a short- or long-term time horizon, in a market that is generally moving, or in a situation where prices are rangebound.
Even though timing a strategy or accurately predicting the stock market are near impossible, there are a few signs that can help you get a sense of what might be ahead. Stock prices can be influenced by certain economic conditions, giving you a glimpse into the future. The stock market cares about economic news because firm profitability is correlated with the state of the economy. A healthy economy is important for many businesses whose shares are traded on the stock market. More people are purchasing goods and services, and they are also more willing to invest, while the economy is growing. The stock prices are supported by all of this. In contrast, when the economy is in trouble, individuals prefer to hold off on making purchases, which causes businesses’ profits and stock prices to fall. We will attempt to comprehend some of these events in this chapter, as well as how the stock market responds to them.
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Economic Activities and their Impact on Stock Market
Equity investments are risky due to shifting stock values. Risk-averse investors typically avoid the stock market. The risk-takers, on the other hand, make aggressive stock investments to build wealth over time. The stock market is dynamic, which makes investing there a fascinating prospect. The stock market’s future performance is impossible to forecast. Whether or not to invest is kept on the investor’s mind by this. A few Economic Activities and their Impact on the Stock Market, especially that of India, are discussed in this article.
Monetary Policies of RBI and Interest Rates
The Reserve Bank of India (RBI) is the supreme authority in India that controls monetary policy. RBI continuously evaluates its monitoring strategy. The stock prices are impacted by any change in the repo and reverse repo rates. The liquidity in the banks is decreased if the RBI increases the key rates. Because of this, they must pay more to borrow money, which causes them to raise lending rates. As a result, borrowing becomes extremely expensive for the business sector, and some companies may struggle to make their loan payments. Every two months, the RBI meets to discuss rates. The market keeps an eye out for this important occasion. Interest-rate-sensitive stocks from a variety of industries, including banks, automobiles, housing finance, real estate, metals, etc., would be the first to respond to rate choices.
| Rate | Definition |
| Repo Rate | Banks can borrow money from the RBI whenever they need to. The repo rate is the interest rate at which the RBI loans money to other banks. The cost of borrowing is high when the repo rate is high, which causes the economy to grow slowly. The market does not like the RBI raising repo rates. |
| Reverse repo rate | The rate at which the RBI borrows money from banks is called the reverse repo rate. Banks are happier to lend money to RBI than to a corporation since they are confident that RBI won’t default when they do so. However, the amount of money available in the banking system declines when banks decide to lend money to the RBI rather than a corporate organisation. Reverse repo rate increases tighten the money supply, which is bad for the economy. |
| Cash reserve ratio (CRR) | Maintaining funds with the RBI is a requirement for every bank. The CRR affects how much they keep in reserve. The economy would suffer if CRR rises because more money will be taken out of circulation. |
Investors start selling the company’s shares because they perceive it as a barrier to the expansion of corporate operations, which lowers the stock price. When RBI practises dovish monetary policy, the situation is the opposite of this. Banks lower their lending rates, which causes an increase in credit. Investors view it favourably, and the stock price rises as a result.
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Regulatory Policies of SEBI
The performance of the shares of the listed firms on the stock exchanges is impacted by any modifications to trading and investing policies made by the Securities Exchange Board of India (SEBI), which monitors all stock market operations (NSE, BSE). Two important benchmark indices in India are the Nifty50 and the Sensex.
Government Policies
Government policies have a significant impact on the economy and industry. To improve the nation’s economic situation, the government must introduce new policies. Any new policy move has the potential to boost the economy or tighten control. This raises the risk that any modification or implementation of a new government policy will have an impact on the stock market. For instance, the industry is adversely impacted by the rise in corporation taxes because the companies’ revenues would suffer and their stock price will drop at the same time.
Inflation and Deflation
Banks raise their lending rates in response to an increase in interest rates, which raises costs for both businesses and individuals. The business’s ability to make a profit will likely be impacted, which will affect the stock price of the company. A rise in the cost of goods and services over time is referred to as inflation. Investment and long-term economic growth are discouraged by high inflation. Stock market-listed companies may delay investments and stop production, which would result in negative economic growth. A decrease in the value of savings could result from a decline in the value of money. Because no one will want to invest in them, the stocks of opulent corporations likewise tend to fall. One’s purchasing power and investing power are both negatively impacted by this. The stock market is affected by price pressure. Costs rise as a result of inflation, or increasing price pressure. Because of the sharp decline in purchasing power brought on by high inflation, there are worries that businesses will start hoarding cash.
Deflation, on the other hand, is regarded as being just as serious a concern. Although decreasing prices provide consumers more purchasing power, deflation is regarded as a major indicator of impending economic problems. It’s thought to be ideal to have some inflation, but not too much. Utilizing interest rates as a tool to control inflation within a “manageable” range is one of the RBI’s primary responsibilities.
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Domestic Institutional Investors (DIIs) and Foreign Institutional Investors (FIIs)
The stock market is significantly impacted by FII and DII activity. Their entry or exit will have a significant impact on the equity market and affect stock prices because they play a significant role in the company’s stocks.
International Transactions
The strength of an economy and its currency is impacted by the movement of money between nations. A nation’s economy and currency deteriorate as more money leaves that nation. Countries that export primarily, whether in terms of tangible items or services, are constantly importing money into their nations. The financial markets in those nations can be stimulated by the reinvestment of this money.
Gross Domestic Product (GDP)
When it comes to the stock market, the gross domestic product, or GDP, is an intriguing entity. Stock prices often benefit when the GDP reading is higher because it signals optimism about economic activity. 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. When confidence declines, stock prices can follow suit. As activities are sparked by the declining stock market and have an influence on GDP, the cycle may reoccur.
Unemployment
The importance of understanding that unemployment is a lagging sign for stocks cannot be overstated when considering it. As a result, it’s frequently taken as a sign that something is wrong with the economy already. There has undoubtedly been some change in the economy by the time the unemployment rate declines. On the other hand, the stock market may suffer if the unemployment rate is higher than anticipated when it is released. People who are looking for work but are unable to find it are indicated by a high unemployment rate. As unemployment rises, economic confidence declines, and stock prices frequently follow suit.
Index of Industrial Production (IIP)
A short-term measurement of how the nation’s industrial sector is doing is the Index of Industrial Production (IIP). The Ministry of Statistics and Programme Implementation releases the information each month, along with data on inflation (MOSPI). The IIP, as its name suggests, evaluates production across all industrial sectors in India while maintaining a constant benchmark. India now makes use of the 2004–2005 reference period. The base year is another name for the reference point. The ministry receives production data from around 15 different industries, compiles it, and then publishes it as an index number. If the IIP is rising, this is a good indicator for the economy and markets since it denotes a dynamic industrial environment (as production is rising). A declining IIP is a bad omen for the economy and markets since it denotes a slow-moving production environment. In conclusion, an increase in industrial production is advantageous for the economy, whereas a decrease raises concerns. The Index of Industrial Production is becoming more significant as India’s industrialization progresses. IIP figures that are lower put pressure on the RBI to reduce interest rates.
Exchange Rates
The Indian Rupee’s exchange rates with other currencies are constantly changing. Indian goods become more expensive in overseas markets when the rupee strengthens relative to other currencies. The ones with international activities are the most impacted. Export-dependent businesses see a decline in demand for their products abroad. As a result, export revenue declines and such companies’ home country stock prices plummet. In contrast, as the rupee weakens relative to other currencies, the stock prices of exporters increase and those of importers decrease.
Trade wars, Politics and Economical and Political shocks
The economy and stock values are equally impacted by global changes. For instance, a spike in energy prices may result in decreased sales, profits, and stock prices. Economic activity may decline after a terrorist attack, and stock values may decline as well.
The economy and financial markets are significantly impacted by factors like elections, budgets, government intervention, stability, and other considerations. Political developments and budgetary announcements cause the market to be extremely volatile, which has a significant impact on the stock market.
The problem with trade wars and tariffs is that they increase costs for businesses. On the goods they import from other nations, they must pay greater taxes. They must choose whether to forward the expense to 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 on the expenses. Even if trade wars may not have a permanent effect, they do have an impact on the economy and stock values.
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Purchasing Managers Index (PMI)
The purchasing managers’ index (PMI) is a measure of business activity used to assess the health of the nation’s manufacturing and service industries. This indicator is based on a poll, and the respondents—typically buying managers—indicate how their view of the business has changed over the past month. The service and manufacturing sectors each receive a separate survey. On a single index, all of the survey’s data are combined. New orders, output, business expectations, and employment are typical survey topics. The PMI reading often fluctuates around 50. An economic expansion is indicated by a reading above 50, and a contraction is indicated by reading below 50. Additionally, a reading of 50 shows no change in the economy.
Natural Disasters
Natural disasters negatively impact both people’s lives and the economy. It affects how well the business performs and how willing consumers are to spend money. Lower consumption will result in lower sales and revenues, which will eventually hurt the company’s stock performance.
Oil Prices
The general economy is impacted by several economic indicators, which eventually affect the financial market. The stock market is significantly impacted by changes in GDP and oil prices. Any price change is likely to have an effect on the economy in a nation that depends on imported oil. One of the main factors affecting the stock market is the fluctuation in oil prices. Prices will grow as expenses rise, which will limit buyers’ capacity to make market investments as prices climb.
Corporate Earnings Announcement
Perhaps this is one of the significant occurrences to which the stock market responds. Every quarter, the listed firms (those that trade on the stock exchange) are required to release their earnings figures, also known as the quarterly earnings numbers. The corporate discloses information on numerous operational operations during an earnings statement, including:
- How much money has the business made?
- How has the business handled its expenses?
- How much was the corporation required to pay in taxes and interest fees?
- What was the quarter’s profitability?
Additionally, some businesses include a summary of what they anticipate for the next quarters. Corporate guidance is the term used to describe this forecast. When a company reports its results each quarter, market participants compare those figures to what they believe the company should have made. The “street expectation” is the expectation of the market participant. If the company’s earnings exceed street expectations, the stock price will respond favourably. According to similar reasoning, if the actual numbers fall short of the street expectation, the stock price will decline. The stock price typically trades flat with a bias toward the downside when the street expectation and actual numbers line up. This is primarily due to the company’s inability to deliver any pleasant surprises.
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Speculation, Expectation and Investor Sentiment
The financial system is not complete without speculation and expectation. Different opinions on the direction the economy will go in the future are held by consumers, investors, and politicians, and this influences how they behave today. Future behaviour is influenced by current behaviour and influences both present and future trends. Sentiment indicators are frequently used to determine how different demographics feel about the state of the economy. A bias or anticipation of future price rates and trend direction can be formed from the analysis of these indicators as well as other types of fundamental and technical analysis.
Stock prices can rise or fall as a result of changes in investor attitude or confidence that affect the market. The value of a stock can be impacted by the broad direction that the stock market takes:
Bull market: A robust stock market where prices are increasing and investor confidence is rising. It frequently correlates with investor optimism as well as economic growth or recovery.
A bear market is a sluggish market in which stock prices are dropping and investor confidence is waning. It frequently occurs when there is a recession, high unemployment, and rising prices.
Gold Prices and Bonds
The relationship between stock price and the prices of gold and bonds is not stated by any well-established theory. Stocks are typically viewed as riskier investments, whereas gold and bonds are viewed as havens for secure investments. Investors, therefore, favour making secure investments during any significant economic crisis. As a result, the price of gold and bonds rises while the price of stocks declines.
Supply and Demand
Prices are driven up and down by the supply and demand for goods, services, currencies, and other investments. As supply or demand shifts, so do prices and rates. Prices will increase if there is a demand for something and the supply starts to decline. Prices will decrease if the supply grows more than the existing demand. Prices may change higher and lower when demand rises or falls if supply is comparatively steady.
Industry Performance
The stock prices of businesses in the same sector frequently move in synch with one another. This is because businesses within the same industry are typically impacted similarly by market conditions. However, if two businesses are contending for the same market, occasionally bad news for one will boost the stock price of the other.
Company News and Performance
The following company-specific variables can impact the share price:
- news releases on revenues, profitability, and projected future revenues
- the declaration of dividends
- a new product launch or a product recall
- obtaining a significant new contract
- employee dismissals
- expected merger or acquisition
- a shift in leadership
- blunders or controversies in accounting
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The company’s stock price may increase or decrease as a result of various reasons. After thoroughly comprehending the aforementioned elements, the investor should ideally have a sound allocation strategy in place. It will guarantee that the client makes the best investment choice and yield outstanding profits over the long term. The stock market may be impacted by a wide range of additional factors. Don’t put all of your reliance on economic variables, but you may look at how numerous factors and indicators are coming together to get a sense of the general direction things are going. Since economic cycles are normal and frequent, you can at least obtain a general notion of how to get ready for what might come next, even though trying to time the market might not be successful. Download the Entri app to improve your knowledge about the stoke market.
