Along with slowness in economy, there are various other economic factors as well which bring about a significant change in the valuation of stocks.
Stock markets are generally considered as one of the indicators of the health of an economy. Any upside or downside in the economy affects the stock markets just like sluggishness in India’s economy affects Sensex and Nifty. Along with slowness in economy, there are various other economic factors as well which bring about a significant change in the valuation of stocks. Among them, changes in interest rates, inflation or deflation and happenings in global markets are counted as the significant ones. Here, we will see, how these three economic factors impact the health of stock markets.
Any change in interest rates affects the stock markets. Any increase in key policy rates means that investors will be able to borrow less money as borrowing becomes expensive. The companies react by cutting back their spending or laying off workers in order to compensate for the higher costs. The companies, in such a scenario, can’t borrow as much required and this impact their earnings in an adverse way. This all adds up to cause a plunge in the stock markets.
Inflation in economics is defined as any rise in the average price of goods and services in an economy during a period of time. Any rise or fall in inflation affects the stock markets in a number of ways. In case of high inflation, corporates find it difficult to pass on higher input costs to consumers and it takes several months for them to do such. Not only the, even the customers feel pinch when goods and services become pricier. They also tend to hold less cash in such a scenario, as inflation eats away their savings. In such a scenario, investors tend to invest less in the stock markets since they hold less cash. Inflation’s impact on stock markets and economy is different and hence, it further confuses investors.
The global economic trends affect the stock markets in a number of ways. For instance, in case of a global recession, companies are unable to sell as many goods overseas as they used to. It results in a plunge in revenue which leads up to an impact on stock markets. If foreign exchanges begin to fail or observe sharp plunge, then it may lead to investors in anticipating a ripple effect, resulting in a drop in the country’s stock exchange.