Over the last few articles, we have discussed the potential influences on the stock market. Specifically, we looked at how micro-economic factors could influence stock prices. This time around, we will take a closer look at more macro-economic influences on the market.
There are many of these, and they are usually not at all something a company can control. These factors tend to affect economies in their entirety.
The effects of inflation
Inflation is very important when it comes to a country. Countries need to control their inflation effectively if they are to remain stable. If you do not know, this is the process whereby the value of currencies decreases over time. This happens as goods and services become more expensive. If this happens slowly, it is usually a good thing. The more a country’s economy grows, the more expensive its goods and services get. Therefore, this inflation can be a sign of economic growth. Countries, therefore, try to slowly allow for currencies to inflate.
There are definitely less positive circumstances, though. Countries could be doing badly, which leads to the supply of certain items to decrease. The demand for essential products, like food, will remain the same. This will result in the price of these items rising, but this will also inflate the price of a currency. This sort of inflation is a lot faster and harder to control.
This is then a sign on whether or not an economy is performing well. This then influences how stock markets behave, as people spend less money on companies. As a result, investors change how much they invest in a company.
This is why governments try to avoid having their inflation to be too high. They want low and slow inflation, which is a sign of growth. They can control the amount of inflation by artificially controlling the volume of a currency that is available. If they want more inflation, they simply print money. Sometimes then, the inflation of a country can be deceptive. Governments may be covering up a poorly behaving economy with a band-aid.
In the next article, we will carry on by discussing the effects of interest rates and other factors.