Founding Partner, Investment StrategistAlfred is a global investment specialist with more than 20 years’ experience. Having started his career as a trader, Alfred has spent years learning the intricacies of the various markets including stocks, bonds, commodities, consumer financial products, property, and more.
With that in mind, it might be helpful to understand what affects stock markets. The more you understand about market influences, the better able you will be to weather storms that might cause others to panic. Whatever you do, remember this: stock markets eventually rebound after significant losses. Just be patient and let nature take its course.
Every developed nation has at least one stock market. Therefore, the first thing to consider are the domestic influences on those markets. Any such changes will have at least a ripple effect on other world markets.
Domestic influences include:
- Inflation/Deflation – As inflation and deflation go, so do stock markets. Markets tend to do well during periods of controlled inflation as moderate gains are observed in consumer prices.
- GDP – Gross domestic product influences markets because it is a measurement of economic health. A strong GDP report tends to boost markets while a weak report will suppress them.
- Employment Rates – Employment is another key economic indicator. Strong employment numbers tend to strengthen stock markets and vice-versa.
- Retail Sales – Markets are affected by retail sales inasmuch as a large percentage of publicly traded companies rely on a strong retail market for growth and expansion.
Experienced stock market investors are smart enough to know that there are as many, if not more, global influences that have to be accounted for. As previously stated, domestic influences that affect one market tend to have a ripple effect around the world. When you combine those ripple effects with global influences, you can begin to see how stock markets are swayed.
Global influences include:
- Energy Prices – We live in a world that would all but grind to a halt if our energy supply were interrupted. Therefore, any movement in energy prices tends to directly influence the world's stock markets.
- Currency Value – Central banks attempt to maintain stable currency values by controlling the money supply. If one currency suffers a significant devaluation that cannot be overcome by money supply manipulation, stock markets can fall. We observed this very scenario when China devalued its currency back in 2015.
- Military Conflict – Military conflicts around the world have long played a role in the directions markets travel. Instability, especially in the Middle East and Europe, tends to result in falling markets. Stock markets are strongest during times of global stability.
- Political Uncertainty – To the extent that there are still major political powers in the world, any uncertainty linked to those powers can affect markets negatively. For example, some markets suffered significant losses in the days after the Brexit vote. We are likely to see significant movement as a result of the US presidential election in November.
Stock Markets and Supply and Demand
Despite all of the different influences that can affect stock markets and individual stock prices, it really all boils down to the simple law of supply and demand. The company whose stock is highly demanded is one that will enjoy a very good price that gains more often than it loses. Conversely, a company whose stock is not desirable will struggle to maintain a stable and attractive price over the long term.