How Economic Indicators Provide Insights Into Upcoming Stock Market Trends? Read Here

Like price indicators, economic indicators provide insights into upcoming trends as they have a broader impact on the market forces, affecting trading activities and outcomes

Economic indicators such as GDP, inflation level, Cash Reserve Ratio or borrowing interest rates, unemployment rate, and crude oil prices tend to impact the economy and stock performance. ( Image Source :Getty )

By VLA Ambala 

Economic indicators are macroeconomic measures that help comprehend the scope of current and future economic prospects. Ideally, these indicators come from the verified data shared by the government and non-profit organizations. Like price indicators, economic indicators provide insights into upcoming trends as they have a broader impact on the market forces, affecting trading activities and outcomes. For instance, a strong economy with low inflation and interest rates often prompts a bullish market, whereas a weak economy with high interest and inflation levels triggers a bearish market.

However, regardless of such insight, it is difficult to answer questions like whether the market will rise or fall, if it could be in the consolations range in the future, or what could be upcoming market trends and movements, in a few words. This is because one needs to understand the fundamentals of the macro and microeconomic factors that influence market movements to gauge their intricacies. After understanding the correlation between the stock market and economic indicators, individuals can make profitable trading decisions.

On that note, let’s discuss some of the most reliable economic indicators to help analyze the market’s changing mood, suspected movement, and upcoming trends. It is true that while no one can time the market, they can predict its movements up to a certain level.

Inflation

An inflation rate between 1 per cent and 3 per cent is deemed healthy for stock performance. However, extended periods of high inflation rates are concerning as they lead to uncertainty and volatility, slowing economic growth. An inflation rate higher than the income growth also spells trouble for the economy. For instance, the consumer price index (CPI) indicates the consumers spending in crucial areas, including food, energy, and rent, and a sharp rise in CPI suggests that the prices of goods and services have increased. This surge leads to a decrease in consumer spending and the value of stocks in the stock market, which means reduced earnings for investors and traders.

Gross Domestic Product (GDP)

Economic growth is measured based on the change in GDP against a constant price. It’s an important indicator that represents an accumulated index of all sectors' final business outcomes. In April-June 2023, GDP jumped 7.8 per cent year-on-year, up from 6.1 per cent during January-March. The figure showed that consumers spent more between April and June than January and March, as the inflation rate fell during the same phase, boosting confidence in the economy and triggering an inflow in the stock market. This movement shows that a high GDP impacts stock prices positively.

Unemployment Rate

Data by the Centre for Monitoring of Indian Economy (CMIE) stated that the unemployment rate in India plunged to 7.1 per cent, down from 8.1 per cent in August. Ideally, a high employment rate is a positive economic and stock market indicator. It is because when the unemployment rate is low, consumer spending is higher, which leads to higher company profits and better stock market performance. Ultimately, a low unemployment rate signals better earnings for traders and investors.

Balance of Trade (EXIM Trade Data)

India’s total exports in September 2023 were estimated at $63.84 billion, down from $64.61 billion in September 2022. Meanwhile, the total imports in September 2023 are estimated to be $68.75 billion, against $79.64 billion in September 2022. The Balance of Trade shows the amount of money the country spent on imports against the money it earned on exports. It’s measured by recording the products that pass the customs office of a nation. A positive EXIM trade data indicates that the country has recorded more exports than imports, strengthening local currency. Conversely, negative data means the country recorded more imports than exports. This factor is crucial as positive data boosts investors’ confidence in the stock market and strengthens local currency.

Cash Reserve Ratio (CRR)

In September, CRR was set at 4.5 per cent in September 2023, keeping the ratio unchanged from the previous quarter. Notably, this economic indicator is the percentage of deposits commercial banks are mandated to keep with the RBI. The regulatory body uses the ratio to control and contract the money supply in the economy based on the nation’s liquidity requirements. Increasing the CRR decreases lender’s ability to lend, which can lead to a decrease in the money supply and inflate borrowing rates. Such changes make it expensive for firms to borrow money to invest and grow businesses. As a result, earnings growth may slow down, lowering stock prices.

Price of  Crude Oil

Crude oil or gas price is a crucial economic indicator, and fluctuations in its numbers or stock performance offer traders an idea of their consumption or production over time. However, multiple factors, including demand and supply, global economic trends, and geopolitical conflicts, can influence oil prices. For instance, the recent Israel-Hamas war has caused the equity market to decline, but more pronounced movements were in oil prices, with Brent crude soaring up 11 per cent. Such volatility of oil prices has a trickle-down effect on stock market earnings and complicates the government’s endeavors to control inflation.

Hence, economic indicators such as GDP, inflation level, Cash Reserve Ratio or borrowing interest rates, unemployment rate, and crude oil prices tend to impact the economy and stock performance. Stock market traders must study their connections to make informed and lucrative trading choices.

The writer is a SEBI-registered research analyst and founder of Stock Market Today.

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