Other macro factors to be aware of when investing in American stocks

In the previous chapter, we dealt extensively with currency movements and saw how they can impact your investments. However, currency movements aren’t the only macro economic factor that you should consider when investing in the American stock market. There are a host of other things as well that you should take into account. 

And that’s what we will be looking at in this chapter of Smart Money. Here’s an in-depth look at the various other macro factors that you should give some thought to when investing in American stocks.

1. Gross Domestic Product (GDP)

The Gross Domestic Product (GDP) is a metric that measures the total value of all the finished goods and services produced by a country in a year. It is a key indicator that shows you just how a country has performed. Ideally, the GDP of a country should either grow or remain stable. 

Contracting (falling) GDP numbers do not bode well for an economy since it is suggestive of the economy slowing down. In addition to releasing GDP data annually, many countries, including the U.S.A also release quarterly GDP data. And so, being an Indian investor interested in investing in American stocks, you should always keep a keen eye on the GDP numbers of the U.S.A since they have the potential to dictate market movements.     

2. Inflation (Consumer Price Index)

Inflation is another very important factor that you should be aware of when investing in the American stock market. Inflation basically indicates an increase in the prices of goods and services and denotes the weakening of a country’s currency. Rising inflation figures mean that the country’s currency is weakening and that the prices of goods and services in that country are on a rise. 

This can end up causing undue stress on the economy, which can, in turn, lead to a fall in the stock market. In the U.S., inflation is measured using the Core Consumer Price Index (CPI). It measures the changes in the prices of goods and services for a given period of time. The Core CPI data is released by the U.S. government on a monthly and quarterly basis. If you are interested in investing in American stocks, make sure you keep an eye on these numbers.       

3. Interest rates

The interest rates of a country tell you a lot about its economy. For instance, if a country has high interest rates, it makes borrowing costlier. And when borrowing becomes costlier, the profit margins of companies tend to go down, taking their stocks along for the ride. On the other hand, when the interest rates are cut down, it eases borrowing and takes the pressure off the profit margins of companies. This generally leads to a rise in the stock prices. 

In the U.S., the Federal Reserve is the central bank of the country and is tasked with managing the interest rates of the economy. The Federal Reserve meets once every quarter to decide upon the various monetary policies and interest rates to be implemented. So, before investing in American stocks, it is necessary to be on the lookout for any changes that the Federal Reserve brings about, since they can influence the markets in the short-term. 

4. Unemployment numbers

The Bureau of Labor Statistics in the U.S. constantly monitors the situation around unemployment in the country and releases the unemployment rate each month. One look at these numbers is enough to give you a rough idea of the country’s job economy. 

Low unemployment numbers and high job data effectively mean that the economy is doing well and has a positive outlook, whereas high unemployment numbers and low job data mean that the economy is heading negatively. Since the American stock market reacts in accordance with the job data, it is another major factor that you should be aware of when investing there.  

5. Industrial output

The U.S. houses some of the biggest industries and contributes a lot to the industrial output of the world. And so, the Federal Reserve releases the industrial production output data each month, which basically serves as a very important indicator of the country’s economic health. 

In addition to providing you with the total output from the various industries in the country, it also gives you insights into the total capacity utilization. If the industrial output and capacity utilization are low, then the economy is considered to possess a negative outlook. On the other hand, if the industrial output is nearabout its capacity, then it may be interpreted as a sign of the economy doing well.

6. Retail sales numbers

The U.S. is one of the largest consumer markets in the entire world. It is for this reason that the Bureau of Census in the country comes up with monthly data on retail sales. This data includes retail sales of consumer durable and non-durable goods and services. Retail sales data is a very good metric that experts use to gauge consumer demand in the country. 

High retail sales numbers mean that the consumer demand is high, which ultimately leads to a rise in the stock prices. Alternatively, if the retail sales numbers are found to be lagging, it is an indication of a slowdown in consumer demand, which is not good for the stock markets. 

Wrapping up

And there you have it. The above-mentioned 6 macro factors play a huge role in the movement of the U.S. stock markets and so, they should be viewed with a keen eye by investors. Now, in the next chapter, we’ll be taking a look at the leading tech industry of the U.S. and its top constituents.    

A quick recap

• Before you invest in American stocks, you also need to consider many macro factors like the GDP, inflation, interest rates, unemployment numbers, industrial output and retail sales numbers. 
• The Gross Domestic Product (GDP) is a metric that measures the total value of all the finished goods and services produced by a country in a year.
• The inflation indicates an increase in the prices of goods and services and denotes the weakening of a country’s currency.
• If a country has high interest rates, it makes borrowing costlier. And when borrowing becomes costlier, the profit margins of companies tend to go down, taking their stocks along for the ride. 
• On the other hand, when the interest rates are cut down, it eases borrowing and takes the pressure off the profit margins of companies. This generally leads to a rise in the stock prices. 
• Unemployment numbers and job data also influence the stock market.
• The U.S. houses some of the biggest industries and contributes a lot to the industrial output of the world. And so, the Federal Reserve releases the industrial production output data each month, which basically serves as a very important indicator of the country’s economic health. 
• The industrial output is another macro factor to consider. 
• If the industrial output and capacity utilization are low, then the economy is considered to possess a negative outlook. On the other hand, if the industrial output is nearabout its capacity, then it may be interpreted as a sign of the economy doing well.
• Retail sales data is another metric that experts use to gauge consumer demand in the country.