Oct 18 2011
While events like the passing of Steve Jobs, CEO of Apple, affect the market, there are many other influences currently coming into play as well. The following article discusses a few basic economic factors like inflation, deflation, interest rates, and foreign markets, and how they influence the stock market.
Economic Factors That Affect the Stock Market
by Arnold Anderson
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Many kinds of factors affect the stock market. Social unrest can cause the market to drop, while a company discovering a new source of renewable energy can cause stock market prices to soar. Several economic factors affect the stock market that every investor should be aware of before getting involved in market investing.
Inflation And Deflation
Inflation can have an adverse affect on the stock market, according to the article titled “Forces that Move Stock Prices” as published on the financial website Investopedia. Inflation is the rate at which the price of goods and services increases. It is the result of several factors, including a rise in the cost of manufacturing, transporting and selling goods. When inflation is at a low rate, the stock market responds with a surge in selling. High inflation causes investors to think that companies may hold back on spending; this causes an across the board decrease in revenue and the higher cost of goods coupled with the drop in revenue causes the stock market to drop. Deflation is when the cost of goods drops. While deflation sounds like it should be welcomed by investors, it actually causes a drop in the stock market because investors perceive deflation as the result of a weak economy.
Interest rates as established by the Federal Reserve Board and individual banks can have an affect on the stock market, according to an informational pamphlet titled “What Drives Stock Prices” published by the New York Stock Exchange. Higher interest rates mean that money becomes more expensive to borrow. To compensate for the higher interest costs, companies may have to cut back spending or lay off workers. Higher interest rates also mean that a company's money cannot borrow as much as it used to, and this has an adverse affect on company earnings. All of this adds up to a drop in the stock market.
Economic trends in foreign markets can have an effect on the stock market in the United States, according to the article titled “Riding the Economic Roller Coaster” published in “Inc.” magazine. When the economies in foreign countries are down, American companies cannot sell as many goods overseas as they used to. This causes a drop in revenue, and that can show up as a drop in the stock market. Foreign stock exchanges also have an effect on the American stock market. If foreign exchanges start to fail or experience sharp drops, then that kind of activity can cause American investors to anticipate a ripple effect, resulting in a drop in the United States stock exchange.
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.