The stock market is one of the most sensitive indicators that can be easily affected by various factors happening in the economy. From GDP data to corporate earnings and market sentiment, here are multiple factors that can influence the market’s movement.

One of the major roles of the stock market movement in the economy, if the economy is running well, the market will be in a bullish trend with strong volume and positive sentiment among the investors. While the economy is running with a crisis will also affect the sentiment of the investors as well as traders, which can be seen with the bearish trend in the market. Let’s find out what the economic factors affecting the stock market are, or how does economy affects the market.

10 Economic Factors Affecting the Stock Market

1.GDP Growth of the Country

Gross domestic product (GDP) is one of the most important factors that very often affect the stock market movement. It is the value of all goods and services produced and exported by the country, including government and private sectors. The significant growth in the GDP means the economy of the country is growing well, which encourages the stock market too.

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The GDP data is counted or released by the government quarterly or annually, and compared to check if there is positive growth in the economy is going on or not. The positive growth will lead to upward movement in the stock market, while lower-than-expected growth or negative growth discourages the stock market, leads to downward movement in the market.

2. Inflation Levels

The rate of inflation is another economic factor affecting the stock market movement. It is an index that shows the increase or decrease in the price of the various goods and services in an economy for a particular period. High inflation means the goods and services are becoming dearer, and that is because of the high money supply in the market that pushing the prices up.

High inflation means the interest rates of banks will also be high, which will increase the cost of borrowing, resulting in a negative impact on the stock market. To control inflation, the central bank (RBI) eases or tightens the interest rates through monetary policy; hence the high inflation leads to negative sentiment in the stock market, while low inflation encourages the market to go up.

3. Foreign Exchange Rates

It is one of the most important factors that not only affects the stock market movement but also affects various other factors in the economy. When the value of the currency of the country is appreciated against other highly circulated currencies, it means the economy is doing well, and the demand for currency for that particular country is also going well.

While a decrease in the value of currency is not a good sign, as the import bill starts swelling also affects the foreign exchange reserve of the country.  And high value of currency also makes the goods imported from another overseas market costlier for the importers as well as end users.

4. Political Conditions

The current political conditions of the country also have a major impact on the stock market movement. It is one of the most important economic factors that is responsible for various other factors in the economy, as well as the stock market movement in the economy. A stable government with positive vision and implementing capability can run the economy very well.

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An unstable government or inefficient government policies would be unable to boost the economy. A stable and resourceful government policy and regulatory framework help the various sectors in the economy to keep growing in a positive manner. And such governance has a positive impact on the stock market movement of that country.

5. Unemployment Data

Though this factor is mainly considered in developed country but also has a significant impact on all types of economies. Either a high level of unemployed people in the country means there is a lack of demand from the industrial and service sectors, or people are not eligible to get the jobs.

Whatever the situation, more unemployed people mean lower consumption in the economy. This high unemployment data also discourages the stock market, as low consumer spending also has a negative impact on the corporate sector and its revenue or earnings growth.

6. Export & Import Trade Data

The differences between the export and import of a country also have an impact on the economy. If economy is running with trade deficit, it is not good for the economy, as the money of country is going outside the country that have adverse impact of forex reserve of a country.

A trade deficit arises when import bill of the country is more than its export bill. And if there are trade surplus, it means that when exports are more than imports, it means the country is earning more revenue from the overseas market, also helping to maintain the forex reserve. And this positive international trade has a positive impact on the stock market movement.

7. Government’s Policies& Regulatory Framework

Merely a stable government is not enough for an economy, there should be favourable policies and a regulatory framework to boost economic growth and make the business environment favourable for the corporate sector. Such polices helps companies operate smoothly without facing any hurdle due to unexpected regulatory actions that can affect their earnings.

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The policies and regulatory framework for different sectors, especially sensitive sectors like banking and pharma, should be strict enough to protect the customer’s interest while making the business operations of such companies more feasible. The strict norms and regulatory frameworks for different sectors have an impact on the index movement in the stock market.

8. Monetary Actions by the Central Bank

The central bank of the country, like RBI in India, is not only responsible for regulating the banking and financial sector of the economy, but also regulates the monetary policy of the economy. The RBI takes monetary actions to control inflation, and when such actions are taken, they directly affect the interest rates of the banks charged while loaning and advanced to its customers.

When inflation is high, RBI tightens the interest rates through CRR and Repo Rates and vice versa when inflation is under control or lower than required rates. The monetary actions by the central banks not only affect the banks and the financial sector but also indirectly affect the various sectors in the economy. And this would have an impact on the stock market movement.

9. Geopolitical Conditions of the Country

Not only the internal factors of an economy, but the external factors also have an impact on the economic conditions. Yes, the geopolitical relation of a country with various nations or its trade partners also has a major impact on the growth of the economy. The healthy relationship with bordering nations will have a positive impact on the economy, while tension with neighbouring nations is not good for the economy. And these factors influence the stock market movement.

In fact, a country the good relations with multiple nations, including its neighbouring country, also attracts the FDI and FIIs. The FDI means more investment in the corporate sector by the overseas investors, while FIIs means more investment in the stock market. Hence, a good geopolitical relation of a country has a positive impact on the stock market movement and vice versa.

10. Natural Disasters and Calamities

Not all the countries in the world have the same terrain; some of them are covered with dense forest, some of them have deserts, while some of them are mainly covered with ice or glaciers. While on the other hand, some countries are rich with various minerals and natural resources like crude oil, gold or metal ore, while some of them are affected by natural calamities.

The dissimilar geographical conditions of the country are also playing a big role in the growth of country. If a country is facing regular natural disasters like earthquakes, floods, tsunamis, wild fire or hurricane or volcanic eruptions and a pandemic affecting its environment badly, then the country will not go well. COVID-19 is one of the recent examples that has affected the whole world, resulting the stock market across the globe sharply fell due to the impact of such disasters.

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Final Words

The stock market has been considered one of the most advanced indicators of an economy, hence, any kind of economic activity in the country will have an impact on the stock price movement. Though the market is also affected by microeconomic factors but here we have discussed only the macroeconomic factors that can affect the stock market and its movement.

GDP data, Inflation, international trade, foreign exchange rates, government policies and geopolitical and geographical conditions of the country are the major economic factors that also affect the stock market of that country. The positive economic growth will have a positive impact on the market, while unfavourable economic conditions have an adverse impact on the stock price movement.