How do economic events affect your stocks?
"Economic events" may sound like white-collar parties, bankers' congresses or summits with finance ministers. But actually, what we are talking about are regularly scheduled events in the economic calendar where organisations and institutions release information about the state of the economy. If you are an investor, you should be aware of them and the effect they may have on the stock market.
On the internet, there are a lot of economic calendars that show the events scheduled for each day in different countries. Or even easier! You can find the daily highlights on economic events in our Invest Feed.
Here is an explanation of the most important ones and how they affect financial markets. Let’s go!
Gross Domestic Product
Gross Domestic Product or GDP is the sum of the market value of all products and services produced in a country during a given period of time. It only takes into account final products, not intermediate sales of raw materials or parts, to avoid counting some things twice. For example, it does not count the wheels sold to a bicycle factory, but it does count the bicycles that are sold to the consumer.
How does GDP affect markets?
Companies, politicians and investors use it as a key tool when making strategic decisions. Do you remember cyclical stocks? The evolution of GDP is one of the indicators that determines what phase of the cycle we are in and therefore how consumers are acting. Companies use it to make development plans: they decide when is a good time to introduce new products and services to the market or improve existing ones.
Consumer Price Index
Is life getting more expensive? This is the question that the Consumer Price Index (CPI) tries to answer. To do so, analysts make a long list of goods and services that everyone consumes on a regular basis: from basic groceries to hygiene products, house rent, furniture, medical care or school fees, among many others.
The CPI compares the prices of all these same things from year to year and puts the differences into percentage changes. All products are then averaged. And basically, this is the reference we have to track inflation. When the CPI goes up a lot in a short period of time it is a sign of inflation, and if it goes down quickly it is a sign of deflation.
How does CPI affect stocks?
When commodity prices are higher, consumers have to save more on more expendable, higher-value products. And when spending falls, so do corporate profits, earnings per share and stock market value. Also, if the CPI rises, the Federal Reserve or the European Central Bank may perceive this as an inflationary trend and raise interest rates, making it more expensive for companies to borrow money and do business.
Interest Rate Decision
The interest rates determine how much it costs to borrow money. Banks need money to function and borrow it from central banks. When interest rates are high, the money they borrow is more expensive and, conversely, when they are low, it is cheaper to repay a loan. As a consequence, this affects the interest rate that banks charge their customers for lending money to them on a short-term basis.
Why is it important for investors?
Just before the interest rate decision is announced, there is often volatility in the markets. As rising rates lead to lower spending, stocks –especially cyclical ones– tend to fall in price. Similarly, when interest rates are low, the stock market tends to rise.
Right now we are in a very peculiar situation because even though inflation has passed the 2% mark, employment figures have yet to recover to pre-pandemic levels. That is why the Fed doesn't want to raise interest rates yet.
Unemployment Rate
The unemployment rate shows the proportion of unemployed people in relation to the total labour force. Remember that the labour force is the population that is of working age and is either working or looking for work. A person who is unemployed and in the last month hasn't been looking for a job or is not able to work for whatever reason is not counted as part of the labour force.
What does it mean for investors?
Unemployment is an economic and social problem, and knowing this rate helps businesses, investors and citizens to gauge the health of the economy. When unemployment is high, investors tend to hold on to their money and consumers tend to think longer before making large purchases. When unemployment falls, people are more willing to invest and spend money.
It is a lagging indicator because its rises or falls are usually not the cause of an economic change, but the consequence.