The stock market is a volatile place that can create and eradicate the wealth of investors in a matter of minutes. For this reason, investors from all over the world are constantly looking for accurate data they can use to predict future market movements.

While accurately predicting stock market performance in the long run is incredibly difficult, some common economic indicators do affect the returns of equities and the broader market and investors who follow them closely tend to stand a greater chance of success.

Many of such indicators are not specific to the stock market and also affect the performance of crypto, forex, bond and commodities markets as well. To learn more about the fundamental indicators most commonly used on financial markets, follow this link.

Consumer Price Index (CPI)

The Consumer Price Index, or CPI for short, is an economic indicator that measures the average change in the prices of goods and services typically purchased by households. Therefore, CPI is the main indicator of inflation within the economy.

High inflation can erode the purchasing power of investors and consumers and lead to rising interest rates. Both of these changes can adversely affect the returns of stocks, on the other hand, low or moderate inflation can be a sign of a stable economy – creating more opportunities for stock investments.

When the CPI spikes sharply, central banks tend to step in and raise interest rates to curb inflation and this often leads to increased market volatility.

Interest Rates

Interest rates are set by central banks, which influence the borrowing costs for consumers and businesses. When interest rates are low, borrowing is cheaper, which encourages investment and spending, which tends to boost stock prices and corporate earnings.

Conversely, when interest rates are high, borrowing becomes more expensive, which slows down economic growth and the returns on stock investments.

In general, the stock market tends to negatively react to rising interest rates, which is why central banks tend to be cautious about raising interest rates too fast to avoid leading the economy into a recession.

Corporate Earnings Reports

The performance of individual stocks are greatly affected by the financial earnings reports issued by the underlying company. For example, if an earnings report overperforms compared to analyst expectations, the price of the company’s stock tends to increase.

Conversely, an underwhelming corporate earnings report may cause the stock price to plummet, which is why it is so important for investors to monitor the financial performance of the underlying business, as opposed to relying solely on the technical indicators of the stock.

Corporate earnings reports are typically released every quarter, with a consolidated report reaching the market by the end of the fiscal year.

Retail Sales Data

Retail sales track the total sales of goods and services from retailers and are an important gauge of consumer spending. Since consumer spending accounts for a significant portion of economic activity, strong retail sales suggest economic growth, which influences investor sentiment on the stock market, causing valuations to rise.


Conversely, underwhelming retail sales statistics may mean that the economy is slowing, which also depresses the performance of equities on the market.

For this reason, retail sales are closely followed by investors and market analysts.

Gross Domestic Product (GDP)

Gross Domestic Product, or GDP, is perhaps the most popular economic indicator that measures the size of an economy at a particular time.

When GDP rises, this indicates that the economy and overall wealth is growing, which is great for investor sentiment and the financial performance of companies, which translates into stock market growth.

However, GDP is often considered by economists as a flawed indicator that does not show the full picture of how particular sectors of the economy are performing. For this reason, certain sectors of the economy may not always rise in line with GDP growth. This is why sector-specific stock indices exist, as they provide investors with a basket of stocks that are involved in a specific industry, such as pharmaceuticals, retail, biotechnology, etc.

Conclusion

The stock market can be very complex and unite equities from various sectors of the economy. This also means that a single indicator is not enough to measure how stocks will perform in the future.

Various factors, such as inflation, interest rates, GDP growth, etc. greatly affect investor sentiment and the performance of stocks.

Therefore, stock analysis often involves the use of multiple indicators and comparison of financial performance to identify profitable opportunities.

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