Economic trends investors should watch.

While it’s impossible to completely predict the stock market, or time the perfect strategy, there are a few indicators to get a feel for what could be coming. Some economic factors influence stock prices, providing you with an idea of what might be next. Economic news matters to the stock market because as the economy goes, so, too, goes company profitability. Many companies whose shares trade on the stock market rely on a good economic environment. When the economy is expanding, more people are buying goods and services, and more likely to invest. All of this provides support to stock prices. Conversely, when the economy struggles, people tend to avoid spending and companies – and their stocks – see a decline. Here are five factors to watch.

Next:Interest rates Credit

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Interest rates

One of the factors that impacts stock prices is interest rates. When interest rates are higher, it makes money more expensive to borrow, eating into company profit margins. With lower profits, stock prices are likely to drop. When the economy is struggling and stock prices are dropping, an interest rate cut – making money less expensive to borrow – often provides a boost. This isn’t always the case, though. The recent interest rate cut by the Federal Reserve was seen as inadequate, so it didn’t do much to help the stock market.

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Economic trends investors should watch.

While it’s impossible to completely predict the stock market, or time the perfect strategy, there are a few indicators to get a feel for what could be coming. Some economic factors influence stock prices, providing you with an idea of what might be next. Economic news matters to the stock market because as the economy goes, so, too, goes company profitability. Many companies whose shares trade on the stock market rely on a good economic environment. When the economy is expanding, more people are buying goods and services, and more likely to invest. All of this provides support to stock prices. Conversely, when the economy struggles, people tend to avoid spending and companies – and their stocks – see a decline. Here are five factors to watch.

Interest rates

One of the factors that impacts stock prices is interest rates. When interest rates are higher, it makes money more expensive to borrow, eating into company profit margins. With lower profits, stock prices are likely to drop. When the economy is struggling and stock prices are dropping, an interest rate cut – making money less expensive to borrow – often provides a boost. This isn’t always the case, though. The recent interest rate cut by the Federal Reserve was seen as inadequate, so it didn’t do much to help the stock market.

Inflation (and deflation)

Price pressure also has an influence on the stock market. Inflation, which is upward price pressure, makes things more expensive. With high inflation, buying power is decreased to a degree that concerns that companies will hoard their money become an issue. On the flip side, though, deflation is seen as just as big a problem. While lower prices mean better purchasing power, the reality is that deflation is seen as a major sign of economic trouble ahead. A certain amount of inflation is considered desirable – but not too much. One of the main jobs of the Federal Reserve is to use interest rates as a tool to keep inflation in a “manageable” range.

GDP

Gross domestic product, also known as GDP, is an interesting beast when it comes to the stock market. When the GDP reads higher, there is optimism about economic output and that tends to help stock prices. The resultant increased spending and sales due to the optimism in turn continues to boost GDP. On the other hand, a lower GDP number than expected can be a harbinger of things to come. Confidence drops – and sometimes stock prices do as well. The cycle can repeat itself as the lower stock market prompts actions that in turn impact GDP.

Unemployment

When looking at unemployment, it’s important to realize that it’s a lagging indicator for stocks. As a result, it’s often viewed as an indication that something is already wrong with the economy. By the time the unemployment rate drops, there’s probably some change in economic conditions. However, when the unemployment rate comes out and it’s higher than expected, it can take a toll on the stock market. A high unemployment rate points to people looking for work – but unable to get it. As unemployment goes up, confidence in the economy goes down, and often so do stock prices.

Trade wars

The Dow Jones Industrial Average lost more than 300 points on Aug. 1 after new tariffs on China took effect, and then lost more than 750 more on Aug. 5 as the trade war intensified. Part of the issue with trade wars and tariffs is that it makes things more expensive for U.S. companies. They have to pay higher taxes on the items they import from other countries. Depending on how long the tariffs last, they have to decide whether to pass the cost onto consumers. High consumer costs can lead to slower buying and slower economic growth. At the same time, though, without passing the costs on, companies take a hit in their profit margins. While the impact of trade wars might not be long-lasting, they do send ripples through the economy, and can affect stock prices.

Other factors

There are plenty of other factors that can influence the stock market. Company earnings can impact individual companies, and general trends when a large swath of companies experience disappointment can lead to big market moves. Also, there are political influences and other impacts, such as those felt because of natural or human-caused disasters. Don’t place your entire faith in economic factors, but you can look at the convergence of different factors and indicators and get a feel for the general direction the wind is blowing. Economic cycles are natural and common, so, while trying to time the market might not work, you can at least get an idea of how to prepare for what might be next.

Economic factors that influence the stock market:

Interest ratesInflation (and deflation)GDPUnemploymentTrade wars1 of 9

Miranda Marquit, Contributor

Miranda Marquit has more than a decade of experience covering financial markets, investing, ...  Read more

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