What Is Macroeconomics in the World of Corporate Finance?
Macroeconomics is the study of large-scale, collective economic management. It’s usually related to the national economy or other issues involving an aggregate of smaller economic entities. Macroeconomics is a very complex subject. Following are some of the macroeconomic influences on performance, value, and price:
GDP: Gross domestic product (GDP) is the total value of all production created in a nation. Increasing GDP is often taken as a sign that the economy is strong and that people should invest more in stocks.
The business cycle: Two or more consecutive quarters of negative GDP growth is the current definition of a recession, which is one of the four parts of the business cycle, the others being recovery, boom, and slump. The rate of change in growth that an economy experiences changes stock prices quite a bit.
Employment: Employment is the ratio of people who have jobs compared to the total workforce. Unemployment is the ratio of people who don’t have jobs compared to the total workforce. High unemployment tends to harm stock prices.
Inflation: Inflation is a change in the purchasing power of a currency, meaning that it takes more money to purchase an equal amount of goods. You know how gas used to be cheaper than it is now? That’s due to inflation. High inflation tends to slow stock market value growth.
Monetary policy: Monetary policy includes any policy regarding the quantity or price of money. That includes altering interest rates, altering bank reserve requirements, altering the amount of money being printed or distributed, and other related policies.
Expansionary monetary policy, such as lowering interest rates and reducing bank reserve requirements, tends to increase stock market prices. Increased interest rates and any policy that reduces the supply of money tends to lower stock prices.
Fiscal policy: Fiscal policy refers to any issues related to taxation and government spending. The influence of these policies on stock prices depends greatly on the specifics of the policy. Increases in spending help those companies who receive the government funds. Even higher taxation depends greatly on who is being taxed, as well as what the tax money is being spent on.
Leading indicators: Leading indicators include any measures of macroeconomic data that indicate what the health of the economy will look like in the immediate future, including new unemployment claims, for example.
Coincident indicators: Coincident indicators are measures of macroeconomic data that indicate the health of the economy now, for example, new industrial production.
Lagging indicators: Lagging indicators are indicators that tend to confirm what the economy has already begun to do, such as duration of unemployment.
Sentiment indices: These are measures of how people feel about the economy. They aren’t entirely accurate nor always helpful, but they do help give us an idea about how people feel about the economy, which does tend to be tied to other hard data.
Consumer sentiment, for example, tends to be down when employment is down or when people don’t feel confident in their employment. These factors tend to influence stocks nearly as significantly as other, more solid, indicators.