World economic factors can significantly influence the stock market, forcing traders to make quick decisions to adjust to the new circumstances. Understanding these market influences can help make you a better trader and cash in on profitability.
Interest Rate Changes
Interest rates are one of the most influencing factors in an economy. The interest rates are set by the Federal Reserve and influence how expensive or inexpensive borrowing money is. It is the interest rate that keeps inflation down or causes it to go up. Changes can affect the whole economy. When interest rates are high, the more expensive it is to borrow money. This makes people cautious of buying a home or car. On the other hand, low interest rates make it easier for the economy to expand and people to invest.
Stocks are affected because the stock value is tied to the company’s profitability which can be restricted when inflation is high.
Inflation is the rate at which a currency devalues in a year. If a country has an inflation rate of 1%, then $100 today is only worth $99 in a year. It is difficult to say what causes inflation, but most financial analysts believe rising interest rates prevent high inflation.
Financial experts are aware that small fluctuations in inflation rates can cause small market changes, especially if the inflation rate is negligible. In recent years, inflation is hard to judge and typically negative for the market. To track changes in inflation, a trader can look at the Bureau of Labor Statistics and the Consumer Price Index.
Domestic and foreign politics can also impact the stock market. When there are critical presidential elections, investors can see increased or decreased confidence in the market. This time can provoke large spikes in demand.
International politics can also influence the trade market. Take the U.S. trade war with China. The implemented policies dramatically affected the marketplace. Increased tariffs brought large fluctuations to the stock market, especially to international stocks like Alibaba. The Alibaba price target was significantly affected by the trade war that began in 2019.
The uncertainty of these situations can affect the price and create volatility in the market. The best way to stay informed of these changes is to review political news and determine which situations could affect stocks.
The foreign markets of Europe, Asia, and other places can at times impact the US financial markets. In many cases, the influence depends on how interconnected U.S. corporations or consumers are on these foreign markets. A crisis in one country can also cause a financial problem in other countries. For example, if financial distress affects China, investors may worry about the growth of U.S. companies.
However, it may be hard to predict how foreign markets will affect the U.S. financial market. In general, this type of situation does not affect long-term investors, although day traders may need to pay attention to foreign stock exchanges just as much as they do the U.S. stock exchange.
There is a strong connection between the unemployment rate and the stock market. Lower unemployment can be good for the economy, but it doesn’t necessarily imply a bullish turn in the stock market. However, when unemployment is low, investors seem willing to pay for higher-priced stocks that may turn bearish due to the higher valuation. As an investor, you will want to keep your eye out for unemployment rates which the Bureau of Labor Statistics announces monthly.
Economic growth projections are a signal of swings in the stock market. Economic growth projections and reported profits need to meet investors’ expectations for future growth. This information can have a significant effect on the stock market.
Economic growth reports can be hard to interpret as the overall economy also influences the stock. However, investors can easily see fluctuations soon after a company releases its economic growth projections.
The stock market is only a part of an economy. It affects both national and international stock prices, but it does not stand alone. Many economic factors affect the growth of a stock. Savvy investors need to be well-read and documented. They need to remain informed of everything that goes on in domestic and international markets to be successful.