An individual company’s profit, revenue, and debt load aren’t the only things driving its stock price. In fact, a number of economic indicators drive broader market sentiment, which in turn affects individual stock prices to varying degrees. You don’t need an economics degree to understand how major indicators influence the market and your portfolio. We’ll walk you through some of the biggest indicators below.
Gross Domestic Product
The most comprehensive economic indicator is gross domestic product (GDP), which measures the value of all goods and services produced in a country during a specific time period. As such, GDP provides a basic measure of growth or contraction in an economy, making it a general gauge of economic health.
Naturally, this measurement has an effect on the stock market because a stock’s price generally reflects expectations of a company’s future profitability. When an economy is healthy and growing, businesses are more likely to report better earnings and growth, and vice versa.
The Consumer Price/ Produce Price Indexes
Inflation is also closely watched by investors. Both the Consumer Price Index (CPI) and Producer Price Index (PPI) measure price changes in a range of goods and services. These are important because rising inflation—that is, higher prices—can hurt consumer spending, which makes up about two-thirds of GDP, and cause the Federal Reserve to raise interest rates to control price gains. Higher rates tend to cool economic activity and have squelched many stock rallies. Falling inflation and resulting interest rate cuts can have the opposite effect, igniting stock rallies.
A more direct measure of the health of consumers is retail sales. Any extended drop-off in retail spending could be taken as a sign of a downturn in the economy, affecting business profits and hiring. An upswing, of course, can be taken as bullish, giving investors reason to push stock prices higher.
While not as important as it once was, industrial production is still a key indicator for the health of the economy. Released by the Federal Reserve, the Industrial Production Index (IPI) provides a snapshot of the health of the nation’s factories. The results can be volatile, so policymakers and investors look for confirmation of a downturn or upswing over multiple months.
The Bottom Line
There are far more influences on stock prices than company earnings reports. The smart investor knows to keep an eye on all key economic indicators that can signal a change in the markets.