Intro to Economics
Economic factors that influence the stock market:
- When interest rates are higher, it makes money more expensive to borrow, eating into company profit margins. With lower profits, stock prices are likely to drop. When the economy is struggling and stock prices are dropping, an interest rate cut – making money less expensive to borrow – often provides a boost.
- Inflation, which is upward price pressure, makes things more expensive. With high inflation, buying power is decreased to a degree that concerns that companies will hoard their money become an issue. On the flip side, though, deflation is seen as just as big a problem. While lower prices mean better purchasing power, the reality is that deflation is seen as a major sign of economic trouble ahead. A certain amount of inflation is considered desirable – but not too much. One of the main jobs of the Federal Reserve is to use interest rates as a tool to keep inflation in a “manageable” range.
- Gross domestic product, also known as GDP
- When the GDP reads higher, there is optimism about economic output and that tends to help stock prices. The resultant increased spending and sales due to the optimism in turn continues to boost GDP. On the other hand, a lower GDP number than expected can be a harbinger of things to come.
- When looking at unemployment, it’s important to realize that it’s a lagging indicator for stocks. As a result, it’s often viewed as an indication that something is already wrong with the economy. By the time the unemployment rate drops, there’s probably some change in economic conditions. However, when the unemployment rate comes out and it’s higher than expected, it can take a toll on the stock market.
- Trade wars and tariffs makes things more expensive for U.S. companies. They have to pay higher taxes on the items they import from other countries. Depending on how long the tariffs last, they have to decide whether to pass the cost onto consumers. High consumer costs can lead to slower buying and slower economic growth. At the same time, though, without passing the costs on, companies take a hit in their profit margins. While the impact of trade wars might not be long-lasting, they do send ripples through the economy, and can affect stock prices.