Macroeconomics Indicators and the Stock Market
Macroeconomics Indicators and the Stock Market
The stock market is one of most essential component of the capital market of a given economy. Through the market, organizations are in positions to raise capital by selling their shares to the member of the public. The market also assists members of the public to participate in the purchase and sales of shares from publicly trading companies. The stock prices and performance depends on the overall performance of the company concerned, the industry of operation, and the overall performance of the economy. The macroeconomic indicators such as the growth in GDP, interest rates, and inflation rates have significant impact on the performance of stock market. This paper provides a comparison of two articles on macroeconomics indicators and the stock market in India. The literature review on the topic, and comparison of their methodologies and conclusion of the two articles, and the concepts learned are the primary areas covered.
The Literature Review
A number of scholars have strived to establish the relationship between the economic indicators and the performance of the stock market. According to Karam Pal and Ruhee Mittal (2011), the increased flow of information has played a significant role in influencing the performance of capital markets across the world. The shareholders and interested investors make use of the information to monitor and evaluate the performance of the stocks of their interests. Conducive macroeconomic environment is important in boosting profitability of a business. The key economic indicators interrelate and affect each other and hence they are useful in determination of the economic environment of the country concerned. All the economic indicators affect the stock prices in an economy, and hence the changes in the prices.
India is one of the important economies across the globe because of its high and consistent growth rate and a large population that provides ready market for goods and services. Capital investment in the country is at the booming state, which facilitates the growth of the economy in different sectors making the economy to be highly diversified (Saurabh, 2012). The performance of the economy declined during the recent world economic crisis, but at a relatively low rate. The recession in the world economy affected demand of goods and services in both the local and internationals market. The recession also led to the decline in the foreign direct investment into the economy. The stock prices in the stock market declined and remained consistently low for a long time. The stock prices are therefore the best measure of the long run measure of the economic performance.
Saurabh Yadav (2012) argues that when economy perform well, and has an expanding trend, the prices of stock increase. On the other hand, when an economy is in a bad state or in a downward trend, the future cash flow and profits of companies decrease which consequently lead into the price of the stock decreases. Investors put into consideration many factors when making their investment decisions, the performance of the stock markets is given the priority because of its ability to capture the trends in other macroeconomic indicators.
The methodology and conclusion
An Empirical Study of Macroeconomic Factors and Stock Market: an Indian Perspective by Saurabh Yadav provides very essential information on economic indicators and their effect on the stock price. The first step in the methodology in the study is the construction of time series. A number of time series applied in the study include CPI, PPI and SP500. Money supply and US Dollar exchange rate are used as an absolute current format. All the indicators are at first treated as 100 while the proportionate value of the indicators in future is measured and the percentage change on the timely bases are determined. The other important step in the valuation is the testing of the long-term relationship of the economic variables. The aim of this step is to determine whether the variables are co- integrated. The co-integration between two or more variables is established when there exists a linear relationship (Saurabh, 2012). Such variables move together in the same direction. The third step is the establishment of the impulse response, which concerns the long-term relationship by the use of the multivariate VAR model.
The conclusion of the study is that the stock market in India is highly influenced by both the domestic demand and the global economic factors. Investors and professionals in search for investment opportunities can find the results of the research very useful when it comes to making the rights investment decision. The finding of the research shows that the stock prices in the Indian economy are more dependent on the local economic factors than the international economic situations. The stocks in India are therefore appealing to many investors from other parts of the world including USA and Europe for the purpose of diversification (Saurabh, 2012). The time series graph on BSE, IP, SPX, and the US Dollar exchange rates among other variables shows an upward growth from 1990 to 2010, which is an immensely positive trend in the economy.
Impact of macroeconomic indicators on Indian capital markets by Karam Pal and Ruhee Mittal is the other article providing insightful information about the relationship between economic indicators and the stock market. The methodology in the study aims at ensuring the study is as objective as possible. Quarterly time series data of the period from 1995 to 2008 in January and December respectively was highly used. In addition to time series, the co-integration test and the error correction mechanism are also applied to capture both the long run and short-term dynamics of the variables and data involved. The findings of the study revealed three key trend or outcomes. The co-integration between economic variables and the stock indices shows that there exists a long-term relationship between the two variables. The ECM reveals that the inflation rate has an impact on BSE Sensex and the S&P CNX Nifty, which are used in showing the trend in the performance of the stock market. Lastly, the inflation rate and changes have shown to have an impact on S&P CNX Nifty over the years.
The conclusion of the study is that changes in the Indian stock market are highly influenced by the changes in macro-economic variables. The variables affect the prices in different ways, but from a positive point of view. The overall performance of the market is brought about by the combined impact of the variable and hence it is the best measure of the nature of the balance at which the economy manages its economic variables.
The two articles are very instrumental and reliable source of information not only to investors but also to economic policy makers. The methodology used in the studies is strong in that objectivity of the highest order is highly upheld. The quantitative and qualitative methods are merged well in the studies giving a detailed information and data for the study. The period covered by both studies, is extensive which assist in getting a wider trend of the variables and their relationships. The findings and conclusion between the two articles are similar which implies that the researcher involved were effective and focused in making findings and making their conclusions. Information and data borrowed are not only referenced, but also have their in text citation provided. As Karam Pal and Ruhee Mitta provided a section on the future scope, Saurabh Yadav did not provide any information or insight about the future research. According to Karam Pal and Ruhee Mitta, the present study provide an insight to key stakeholders particularly the government to develop policies and strategies that bring healthy economic environment for the favorable performance of the economy. In addition, investors both the local and foreign can in future analyze with confidence the macro- economic indicators to predict the performance of the stock market. Despite the fact that Saurabh Yadav did not provide the insight in this case, I find that the two articles have equal strength. The methodology, the finding and conclusion, which are the key bases upon which the strength of an article is measured are similar and highly reliable. The article addresses the question on the relationship between macro- economic indicators and the stock market in India effectively.
Karam, R., M. (2011). Impact of macroeconomic indicators on Indian capital markets. The Journal of Risk Finance. 12(2). pp. 84 – 97.
Saurabh, Y., (2012). An Empirical Study of Macroeconomic Factors and Stock Market: An Indian Perspective. EDHEC Business School. 1- 51.