The stock market, like any of the other financial bourses, can be extremely unpredictable and fraught with uncertainty. How the market will fare on a given day is a question that is on every investor’s mind. Whether it will go up or down, how a particular industry or a select stock is going to perform is dependent on a slew of factors that influence the stock market.
Even for such a volatile market that has so many variables to contend with, the situation has got even murkier in 2020 with the pandemic complicating things.
To declutter it all and understand the ground realities, here is a closer look at 5 factors influencing the stock market.
1. Macroeconomic Impact on the Market
News and updates of a company can affect its share price. But the severe and sweeping impact on the stock markets happens mostly due to macroeconomic factors. These can be connected to any event or development based on economic or geopolitical reasons. These are external factors that are at a pan-industry level and have an impact across sectors.
Here are some of the main macroeconomic factors that can influence stock markets:
Gross Domestic Product
GDP or Gross Domestic Product is a critical economic indicator that is considered a barometer of a country’s economy and a statement on its well being. It is defined as the value of all the finished goods and services of a country over a set period, usually a year.
The economic health of a country is linked to how robust various sectors are. If the general trend and the GDP are strong, it can signal a positive climate for growth that augurs well for companies, and therefore, the end investor and the stock market.
Inflation
Another key indicator that is part of the macroeconomic factors influencing the stock market is the inflation figures of a country. An inflationary condition means both the cost of products and services and the money supply in an economy go up. The stock market can get volatile and stock prices can tend to fall.
Industrial production and sales
The quantum of industrial output and consumer consumption also are good indicators that have an impact on the stock market. Increased economic activity can bring a bounce to stock prices and vice versa.
Unemployment rate
The rate of unemployment has a direct impact on the economy. The connection between higher employment rates and greater productivity, in turn, has a positive impact on increased revenue and corporate profitability.
This is exactly what makes long-term forecast look rosier and, therefore, the stock market buoyant in the short term. Having a confident stock market results in more investors flocking in to buy and trade.
Conversely, a higher unemployment rate can trigger off a slowdown in productivity and a sluggish stock market. Investors tend to stay away in the absence of any positive indicators that normally help fuel investments.
2. The Changing Political Landscape
Apart from the economic news and events in the business sector, political developments really influence the stock market. Besides the difficult pandemic situation that 2020 handed out, the US financial markets were already watching the US Presidential elections with keen interest.
Election year always makes the stock market jittery and volatility is a given. With the presidential elections becoming a fiercely fought battle and the endgame going down to the wire, the markets should have been nervous.
But despite the political rollercoaster, the outlook for the financial markets was mostly positive. Whether it was on account of Trump’s pro-business approach or Biden’s election promising a calming effect on trade, it was a surprisingly buoyant year at the bourses.
The fact also remains that, for most investors, the political scenery does not hinder with the long-term view taken on the fundamentals of a stock. Unlike traders, the investment time horizon need not be held to ransom by periodic developments of a short-term impact.
3. The Impact of COVID19
In a normal year that does not see a natural disaster or calamities, these may not influence the stock market in a short-term sense. But then, 2020 was not a normal year.
The fact that the pandemic induced by the COVID19 virus has taken a severe toll for well over a year is a harsh reality that has had terrible implications for economies the world over. The US, particularly, has also been hit hard with the direct infected cases and deaths being the highest globally.
From the economic standpoint, we know just how many sectors have got ravaged due to lockdowns and the near standstill the continuing pandemic has forced industrial slowdown. The impact has been different for each sector and respective industries have had to fine-tune their strategies and operations ever since the breakout.
The promise of a substantial stimulus was just one part of the good news that helped the stock market hold its own. Towards the end of the year, positive news on vaccine development brought about hope and cheer all around.
4. Stimulus from the Fed
COVID19 has thrown the world economies in disarray and its long term impact ranges from businesses shutting down to economic slowdown and possible recessions in the near future. It has been over a year that most sectors like travel and leisure have totally ground to a halt. Other sectors too have felt the impact in a big way and only a handful of industries have been able to stay afloat.
The US economy joins the rest of the world in its battle against containing the outbreak and trying to restrict the damage that is happening to its economy. It is natural that the business world would look to the government to help them tide over this crisis. The Congress and the US Federal Reserve had been monitoring the situation and working out a stimulus package.
In May of 2020, the House of Representatives passed a $3 trillion aid bill but it fell short of becoming a law. But, in March 2021, President Joe Biden signed a $1.9 trillion economic stimulus bill to give the US people “a fighting chance.” The American Rescue Plan and the stimulus package saw the stock market rally in anticipation of the promise they hold out for the revival of the US economy.
5. Day Trading Patterns
Outside of the economic factors and a natural calamity, there is a factor that can seriously influence the stock market from within. This is a contributing factor in every stock market or even financial market like the forex where day trading practices can have a significant impact.
The year 2020 and even early 2021 has witnessed that trend where a dip in the market in the first quarter of 2020 saw day traders get into buying mode. There has been, of late, a shift from the dominance of institutional investors to the rise of day traders getting into the act.
This causes scenarios where short term starts to take centre stage with growth stocks getting picked up over value stocks. But with other avenues of investment like the real estate market taking a backseat, more investors are flocking to the stock market.
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