The Impact of a Conducive Economic Environment
The stock market is quite difficult to predict because it depends on various factors that may result in increased or decreased stock market prices. In most cases, the good economic news is associated with a good performance for the stock markets while negative economic news is associated with decreased performance. However, this is not always the case because sometimes bad economic news may be translated as good news for the stock market.
The stock market encompasses many companies that sell and buy shares in the market, and the ability to generate revenues depends on the availability of a good economic environment or conditions. When the economic conditions are conducive or good, most companies are likely to have higher rates of profitability.
In a conducive economic environment, many people are likely to have extra money for spending, and this means that they will buy goods and services offered by companies. In addition, people are also likely to have sufficient money to cater to their individual needs as well as some for investment. Consequently, the stock prices are likely to be higher when there are many people willing to invest in the same, and this is beneficial to the companies and the stock market in general.
For example, an individual such as Aneel Bhusri net worth is over 90 billion dollars. Bhusri owns 378,280 shares of Workday stock, and this translates to over 90 billion dollars in cash. If the economic conditions are conducive and the stock prices become higher, Bhusri would sell his shares at a higher price and consequently generate high amounts of profits.
Good economic news such as a reduction in the taxation rates may be beneficial to the stock market and other businesses in a country. When the taxes are high, some individuals are known to move out of the country and settle in other countries where taxes are lower. Such individuals argue that conducting business in a country where tax rates are high is not a feasible option, therefore, they seek alternative locations for their business.
Since high taxation has never been good news to the economy, it may discourage potential investors from investing in various sectors, and this is not good for the stock market either.
The Impact of Pandemics
Because the stock market is dependent on the prevailing economic conditions of a country, good news related to the economy will mostly be associated with better performance of the stock market. Conversely, bad economic news such as a pandemic would negatively affect the stock market.
Pandemics such as COVID-19 usually result in loss of jobs and huge amounts of money being redirected towards fighting against the same rather than being used for economic development. People are usually cautious about buying stocks during these periods, and this is not beneficial to the stock market. While good economic news results in people tending to purchase more stocks and consequently the stock prices increasing, pandemics result in most people selling their shares leading to a decline in the price of the shares.
The reason why a pandemic may affect the stock market negatively is that when people are selling their shares, there exists a situation of the demand being lower than the supply. As expected, the stock prices will fall when the supply exceeds the demand. When more people are willing to buy stock shares, there exists a situation of the demand being higher than the supply and this ultimately results in increased prices of the stocks.
Pandemics may force some industries to close temporarily an example being the airline industry during the COVID-19 pandemic. During this period, most countries placed restrictions concerning international flights, and this led to many people losing their jobs and the airline industry suffering huge losses because there were no customers. Since the value of a company’s stock is highly influenced by the company’s earnings, the airline industry must have endured heavy losses during this period.
The industry was not generating as much money as previously, and as such, its shares were not selling at good prices. But after the restrictions on international flights were removed, the industry has been catching up. This is a good example that bad economic news is associated with bad news for the stock market as well.