Learn With ETMarkets: Role of economic indicators in stock market analysis

It’s worth pondering why stock prices fluctuate daily despite companies announcing their financial results quarterly. Alongside corporate announcements, macroeconomic factors and indicators significantly influence stock markets. Let’s delve into their role.

Which major indicators affect the stock market?
Monetary Policy

Monetary policy, managed by a country’s Central Bank, balances economic growth and inflation by adjusting interest rates. In India, the Reserve Bank adjusts the Repo Rate to control the money supply. Lower rates spur economic activity, while higher rates curb inflation.
Case in point: During the COVID-19 pandemic, India slashed rates to stimulate economic recovery, fueling stock market rebounds.

Fiscal Policy

Governments use taxation and spending to support growth. Tax cuts increase disposable income, driving consumer spending and economic growth. Strategic spending boosts sectors like defence and railways, benefiting associated companies.

Case in point: In September 2019, when the government slashed corporate taxes, the stock markets welcomed the move, with the Nifty 50 Index rising by 5% in a single day.

Additionally, increased government spending in sectors like defence, railways, and renewable energy has bolstered the future prospects of companies in these sectors, resulting in impressive returns for their shareholders.

Inflation Levels and Unemployment

High inflation and unemployment levels curb consumer spending, impacting demand trends. Inflationary pressures restrain consumption, while high unemployment increases dependency ratios.Case in point: Throughout most of 2022 and 2023, inflation levels in India hovered near the RBI’s upper tolerance range of 2-6%. Consequently, rural India, comprising over 35% of the country’s total demand, remained subdued during this period. This trend was evident in the quarterly results of FMCG companies, which indicated muted volume growth.

GDP Data

GDP reflects total goods and services produced, offering insights into overall economic performance. India’s strong fundamentals and resilient consumption have positioned it as a global growth engine, buoying stock markets.

Case in point: India currently occupies a favourable position, thanks to its robust fundamentals and resilient consumption trends, making it a global growth engine. With projections indicating India as the fastest-growing economy worldwide for the next few years, it’s no surprise that the stock markets are reaching new heights.

Crude Prices

India’s heavy reliance on oil imports makes crude prices pivotal. High oil costs inflate import bills, widening fiscal deficits and spiking inflation as transportation costs rise.

Case in point: When oil prices surged to $120 per barrel in February 2022 due to the Russia-Ukraine war, the Indian stock markets experienced a sideways to downward trajectory.

Retail Sales

Industry-specific retail sales data influence sectoral stock performances. Auto sales data, for instance, impacts automobile companies’ valuations, reflecting broader sectoral health.

Case in point: In CY 2023, automobile companies manufacturing passenger vehicles enjoyed a stellar year, with auto sales volumes reaching pre-pandemic highs and experiencing year-on-year growth. Consequently, 2023 proved to be a prosperous year for the sector.

Beyond these, factors like geopolitical conflicts and natural disasters can also impact markets.

Yet, as Warren Buffet said, “In the short run, a market is a voting machine, but in the long run, it is a weighing machine”. To build long-term wealth, focus on fundamentals amidst short-term fluctuations.

*The article is for information purposes only. This is not investment advice.
*Disclaimer: https://tejimandi.com/disclaimer

(The author is Vice President of Research, TejiMandi)

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of the Economic Times)

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