A stock represents one of the equal parts into which a company's capital is divided and grants its owner ownership rights over that company. Stock markets are financial markets where the shares of companies that have gone public are bought and sold among investors.
Each stock has an intrinsic value. This intrinsic value is based on company-specific factors such as the company's fundamental activities, financial performance, assets, or liabilities. The prices of stocks traded in the stock markets are primarily based on this intrinsic value. However, macroeconomic factors that shape the expectations of investors also lead to fluctuations in stock prices. These macroeconomic factors can be listed as follows:
Gross Domestic Product (GDP)
The Gross Domestic Product (GDP) of an economy measures the value of all goods and services produced or consumed in that economy. There is a strong correlation between stock markets and GDP. An increasing GDP indicates a positive economic outlook and strong consumption, increasing investors' risk appetite. Additionally, companies tend to perform better in a growing economy. Therefore, an increase in GDP leads to a rise in stock prices, while a decrease in GDP results in a decline in stock markets.
Inflation
It is generally accepted that there is a negative correlation between inflation and stock markets. High inflation erodes the purchasing power of households and typically leads to a decrease in overall demand. In such cases, the demand for goods and services that are not essential for basic consumption decreases first. Consequently, the stock prices of companies producing these goods and services will fall. However, inflation may lead to increased revenues for companies producing essential goods and services, resulting in higher stock prices for these companies.Â
Conversely, a deflationary economic environment similarly negatively impacts stock markets. Deflation indicates low household demand. In such an economy, companies' revenues are expected to decrease, unemployment to rise, and economic activity to slow down, typically resulting in a decline in stock markets.
Interest Rates
Another factor affecting stock markets is interest rates. An increase in interest rates generally leads to a decrease in stock markets. The main reason is that when interest rates rise, fixed-income securities such as Treasury bonds, seen as risk-free assets, become more attractive to investors. Therefore, investments tend to shift from the stock market to the bond market. Additionally, an increase in interest rates raises the financing costs for companies, leading them to reduce their investments. This can also support a decline in stock prices.
Labor Market Data
Labor market data also help us make predictions about the general condition of stock markets. If these data show an increase in employment, it generally has a positive reflection on stock markets. The main reason is that an increase in labor demand indicates strong consumption demand. Additionally, as more people work, their incomes will increase, strengthening the expectation of a further rise in overall demand.
Retail Sales
Consumption is often referred to as the king of economies. According to data from the World Bank, consumer spending makes up about 70% of global economies on average. When consumers spend, economies grow; when they don't, economies shrink. Therefore, both governments and companies rely on consumer spending as the cornerstone of economies. Consumer spending is measured by Retail Sales data. Consequently, an increase in retail sales positively impacts stock markets, while a contraction can have a negative effect.
Industrial Production
Industrial Production data is an economic indicator that shows the outputs of the manufacturing, mining, electricity, and gas industries. An increase in industrial production can raise the stock prices of companies operating in these sectors (and vice versa). Additionally, industrial capacity utilization rates are provided alongside this data. Industrial capacity utilization rates give an idea of the strength of demand in the economy; a decrease in capacity utilization is interpreted as a sign of stagnation, while an increase is seen as a signal of economic recovery.
Exchange Rates
Exchange rates can affect stock markets in various ways. First, fluctuations in exchange rates impact imports and exports. When a country's currency appreciates against foreign currencies, imported goods or services become cheaper for consumers in that country, boosting demand. This increases the revenues of importing companies, leading to higher stock prices. Conversely, exporting companies' goods or services become more expensive for foreign consumers, potentially lowering their stock prices. The opposite is true if the local currency depreciates against foreign currencies.
Additionally, exchange rates can influence the preferences of foreign investors and the flow of foreign capital, leading to fluctuations in stock markets. When a country's currency depreciates against foreign currencies, its stocks become cheaper for foreign investors, potentially increasing capital inflows. However, excessive exchange rate volatility can trigger the opposite, leading to capital outflows.
Crude Oil Prices
Crude oil is not only one of the world's primary energy sources but also a fundamental input for many industries. Therefore, rising crude oil prices lead to increased production costs in many industries. During such periods, the most affected sectors