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The Relationship Between Stock Market Prices and Macroeconomic Variables

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In this paper I’m going to explain and evaluate the relationship between stock market prices and macroeconomic variables. As the question says in 1966, a Nobel Prize winning economist Paul Samuelson wrote in his Newsweek column that: “Wall Street indexes predicted nine out of the last five recessions” which means that there is a connection between stock market prices and macroeconomic variables. Stock market price is the current market price that stocks are brought or sold, and Macroeconomics is “the study of the structure, performance, behaviour associated to decision-making of an economy of a city, country or nation” (Courses.lumenlearning.com, 2018). These are the macroeconomic variables that affect the economy are Unemployment Rate; GDP; Recession; Inflation Rate; Interest Rates; The Consumer Price Index; Budget deficits; Exchange Rates; Demand and supply shocks; Federal government policy like Fiscal policy and Monetary policy; Business cycles and Forecasting Future Macroeconomic Activity (Mankiw and Taylor, 2010). In this essay I’m going to focus on GDP; Unemployment Rate and Interest Rate as I believe that this are the key macroeconomic variables that will help explain the relationship between stock market prices and macroeconomic variables.

GDP

Gross domestic product also known as GDP is the financial estimation of all the completed goods and services produced inside a country within one year (Directorate, 2001). The stock market influences gross domestic product (GDP) essentially by affecting s consumer confidence and financial condition. At the point when stocks are in a positively trending market, there tends to be a lot of hopefulness encompassing the economy and the possibilities of different stocks (Nazir, Nawaz and Gilani, 2010). The cost of a share equivalents the sum of all future dividend payments discounted to its present esteem. Dividends are regularly supplanted by income, accepting a consistent profit pay-out ratio. The discount factor can be divided into a risk-free component and an equity risk premium. This present esteem demonstrate at the share price suggests a forward-looking uninvolved, or pointer part at stock prices. Higher stock prices imitate an expansion in the discounted expected profit, giving conceivably valuable data about future economic growth. Stock prices additionally assume a functioning part in the economy through different channels. Higher equity prices give an additional boost to households and firms that claim, regardless of whether specifically or in a roundabout way, for instance by means of benefits reserves, shares through positive riches impacts. Moreover, the share trading system is viewed as a general measure of the condition of the economy through which stock market influence the genuine economy through a confidence channel (Österholm, 2016).

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High valuations enable organizations to obtain more cash at less expensive rates, enabling them to grow activities, put resources into new undertakings, and contract more specialists. These exercises support GDP. In this situation, buyers will probably burn through cash and make significant buys, for example, houses or cars. With stock costs in bull mode, they have become wealthier and start thinking positively about the future forecasts. This certainty overflow into expanded spending, which prompts expanded deals and profit for organizations, additionally boosting GDP (Wu, 2012). The examined unidirectional connection amongst stock price and GDP infers that the level of financial activity in a country, can conceivably rely upon the share trading system among different factors. The watched marvel indicated in the presentation, that significant lots of shortcomings, for example, the ‘lost decade’ in Japan and the Great Depression are related to the benefit value busts that went before them, could accordingly be no minor fortuitous event. The noteworthy withdrawal in resource esteems, set off a resulting compression in utilization and financial action levels. Thus, a huge destruction in stock costs caused a comparable lessening in monetary action. The discoveries hence require a powerful and productive administrative system that keeps the event of runaway costs in household securities exchanges. “Given that stock price appears to Granger cause GDP, the occurrence of bubbles and busts in financial markets is likely to exacerbate volatility in economic activity” (Duca, 2007). Remarks, for example, those made by the resigned Fed Chairman Alan Greenspan in 1996 implying at ‘silly abundance’ in securities exchanges are hence justifiable and essential in shortening the transmitting of instability from stocks to the more extensive economy.

Unemployment

Unemployment rate is the amount of unemployed people as a level of the work drive, where the last contains the unemployed nevertheless those in independent work or paid. Unemployed people are the people who report that they are without work, that they are open for work and that they have figured out how to search for work over the latest multi month. Unemployment does affect the stock market price not only the stock market but rather the whole economic of a country (Guo, 2007). Keynes tested the established idea of labour market equilibrium and the smug perspective of arrangement to which it drove, full time employment came to mean most extreme aggregate supply, the time when development of aggregate demand couldn’t rise employment and output any further. Full time employment was likewise viewed as the economy’s inflation limit; with a deflationary gap, request not as much as full employment supply, prices would decay or even under the least favourable conditions consistent. Development of aggregate demand shot of full employment would cause at most a one-shot increment of costs (Tobin, 1995). There isn’t adequate aggregate request in the economy to offer businesses to everyone who needs to work. Interest for most merchandise and enterprises diminishes, less generation is required and subsequently less pros are required, remuneration is sticky and don’t tumble to meet the balance level, which comes about mass unemployment. With repetitive unemployment, the number of unemployed laborers outperforms the amount of occupation openings, so paying little respect to whether full business was proficient, and each open work were filled, a couple of authorities would regardless remain unemployed. Some interface patterned unemployment with frictional unemployment asserting the components that root the grating are to some extent caused by repetitive variable. For example, a startling decrease in the money supply may stagger sensible financial components and suddenly limit total request. Keynesian business experts at that point once more watch the nonappearance of supply for livelihoods as possibly resolvable by government involvement (Farsio and Fazel, 2013).

There are some who believe that they are a negative relation between stock market price and unemployment rate as they experiment to explore the statement by some monetary experts that a negative easy-going connection exists from unemployment to stock costs, and that unemployment rate can be utilized to foresee future stock costs. As they investigated factor determinants of unemployment rate and stock prices and theorized that there would be no steady long haul causal relationship from unemployment rate to stock prices. Moreover, utilizing quarterly information covering the 1970-2011 period, we gave experimental help to their speculation in the three biggest world economies. The exact examination of this paper depended on cointegration and Granger Causality tests. There discoveries have one critical ramifications for speculators: it would be a mistake to depend on information for unemployment rate predictions and trends to make any investment decisions in the stock market (BOYD, HU and JAGANNATHAN, 2005).

Interest rates

Interest rate is the sum charged, expressed as a percentage, by a moneylender (banks) to a borrower (customers) for the utilization of benefits. Interest rates are regularly noted on a yearly premise, known as the annual percentage rate (APR). The assets hired out could include and large assets such as a vehicle or building; cash or consumer goods (Oxford Dictionaries | English, 2018). The financial media and the investment community tend to fixate on interest rates; the cost somebody pays for the utilization of another person’s money and considering current circumstances. At the point when the Government Federal Open Market Committee (FOMC) sets the objective for the federal funds rate at which banks get from and loan to each other, it has a progressively outstretching influence over the whole U.S economy also the U.S. stock market. it as a rule takes no less than a year for any growth or reduction in interest rates to be felt in an across the board monetary way, the market’s reaction to a change is frequently more prompt. Understanding the connection between l between the stock markets and interest rates can enable speculators to see how changes may influence their ventures and how to settle on better monetary choices (Otieno, Ngugi and Wawire, 2017).

The interest rate that moves markets is the federal funds rate; which is also known as called the overnight rate, this is the rate safe organizations are charged for borrowing cash from Central bank banks called Federal Reserve banks. The federal funds rate is utilized by the Central bank (the Fed) to endeavour to control inflation. Fundamentally, by increasing the federal funds rate, the Fed endeavours to recoil the supply of cash accessible for buying or getting things done, by profiting costlier to acquire. On the other hand, when it diminishes the federal funds rate, the Federal Reserve is expanding the cash supply and, by making it less expensive to acquire, empowering spending. Other nations’ national banks do a similar thing for a similar reason. At the point when the Fed builds federal funds rate, it doesn’t specifically influence the share trading system itself (Christie, 1982). The main genuinely coordinate impact is it turns out to be costlier for banks to obtain cash from the Fed. However, as noted above, increments in the federal funds rate have an expansive influence. Since it costs them more to obtain cash, financial institutions regularly increment the rates they charge their customers to borrow cash. People are influenced through increases to credit card and home loan interest rates, particularly if these advances convey a variable financing cost. This has the impact of lessening the amount of money customers can spend. All things considered, individuals still need to pay the bills, and when those bills turn out to be costlier, families are left with less discretionary cashflow. This implies individuals will spend less optional cash, which will influence organizations’ incomes and benefits (Alam and Uddin, 2009).

In conclusion each and every macroeconomic variable effect stock market price in different ways some driving towards a step by step growing impact on the economy. All things considered, there is some association between the broader economy and securities trades yet is anything but a faultless relationship. There may be diverse forces at work, for instance, Speculators are outlandishness, exhibit examples and world events that can move the market valuations as well. Speculators can anticipate future outcomes for the economy using macroeconomic elements to some degree anyway also these are gauges because of the various factors which ought to be thought of it as is difficult to express the right inevitable shot of the offer the share stock market.

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