07/02/2020
Macros and Markets
Analyzing the impact of macroeconomic variables on the stock market
Have you ever wondered how macroeconomic variables have an impact on overstock markets? Well, like most of the relationships, the relation between macroeconomic variables and the stock market is also complicated.
Let us start by analyzing the variable from which all the books of macroeconomics start i.e. GDP. Stock markets always benefit from an increased GDP, when most businesses present increased profits and downturn in liabilities, the country’s GDP will expect significant
growth, indicating that its economy is in great condition and that business is good within its sectors. In effect, investors gain confidence in companies so they trust in the stock market more. However, whether GDP is a reliable gauge of the stock market’s condition or not has been an age-old debate. Some believe that the better the economy’s position, the stronger the faith its traders put into investing. But some argue that an increase in GDP might not be due
to an increase in all the sectors. GDP might benefit certain stocks but not the stock market as a whole.
Inflation: -
The next variable is the love of every policymaker i.e. inflation. Generally, an increase in inflation negatively affects the FMCG stocks as it reduces the purchasing power of the people. Thus, high inflation plummets the share prices of FMCG stocks.
Exchange Rate: -
The high exchange rate has a positive effect on the companies whose revenue is largely dependent on export. High exchange rates fetch more home currency for exports. While higher exchange rate results in paying more home currency for importing of goods and services.
Let us take a simple example, suppose the exchange rate was $1 = INR 69 and it changes to $1 = INR 71. Now, if a company imports commodity X then previously it had to pay INR 69 for the said commodity and after the depreciation of the currency against the dollar, it will pay INR 71.
Now, if a company exports commodity X, then previously it received INR 69 and after the depreciation, it received INR 71. Thus, high exchange rates positively impact the revenue of export-oriented countries and negatively impacts the revenue of import-oriented countries. In contrast, when the exchange rate is low, it is good for imports but impacts inversely on exports.
Crude Oil Prices: -
A rise or fall on crude oil prices affects the prices of various commodities. An import on the prices of commodities affects companies. The recent tensions between the US & Iran have affected the oil prices which in turn has led to a decrease in the stock prices. Companies like tyre, lubricants, logistics, footwear, refinery and airlines hugely depend on crude oil prices. Therefore, an increase or decrease in oil prices affects the stock prices of these companies
