STOCK PRICES AS ECONOMIC INDICATOR

1. STOCKPRICES
Submitted By :- Shruti Pendharkar

2. ECONOMIC INDICATORS

3. ECONOMIC INDICATORS
 Economists, analysts, and even individual investors want to keep a pulse
on the economy. But no one wants to wade through the massive volume
of economic statistics that are put out by various entities, both
governmental and private.
 An Economic indicator is any statistic about the economy which
investors use in order to interpret and understand the current and future
health of the economy.
 They provide measurements for evaluating the health of our economy,
the latest business cycles and how consumers are spending and generally
faring.

4. • Where the cycle is going.
• change before the general cycle activity.
• Interest rates, stock prices, exchange rate, GDP
Balance of payment etc.
Leading
Indicators
• Where the cycle is now.
• change with the general cycle activity.
• Industrial Production, real persons income, real
manufacturing and trade sales etc.
Coincident
Indicators
• Where the cycle has been.
• change before the general cycle activity.
• Consumer price index, unemployment rate
business spending and profits etc.
Lagging
Indicators

5. STOCK PRICES

6.  Stock market returns are a leading economic indicator, as the stock
market usually begins to decline before the economy declines and
begins to improve before the economy begins to pull out of a recession.
 This is premised on the assumption that (current) stock prices reflect
expected future corporate earnings growth, which in turn is related to
future GDP growth.
 Stock prices influence consumer and business confidence, which affects
the economy. The relationship also works the other way, in that
economic conditions often affect stock markets.
 It not only signals future changes in the economy but also have direct
impact on economic activity.
 Price of stock equals present or discounted value of expected future
dividends

7. ATTRIBUTES DESCRIPTION
Measured By The total market value of goods and services
produced, annual expansion of the size of the
economy, and the economic strength of the country
relative to other countries.
Significance Reflect economic expectations and investors
attitude;
Reliability factor Somewhat unreliable as have probability for
false signals
Presented on Individual prices in money and indices of average
prices.
Driven By Stock prices are also partially driven by long term
microeconomic and macroeconomic variables.
Nature Seasonal, Cyclical and Defensive.
Released Almost continuously round the clock.

8. WHAT STOCK PRICES
REPRESENT?

9.  What Others Will Pay: -
 Stock prices represent what other investors are willing to pay at the
moment – and which share owners are willing to accept -- for shares of a
company.
 Financial & Economic Health: -
 Investors and economic analysts see stock prices as representing the
financial health of a company and a country. There is an indirect link
between stock price and financial health.
 Rising and Falling: -
 Changes in stock prices have their own signification. Rising of stocks can
represent a positive growth of a company or country. And falling of prices
can represent decline in the growth.
 Value and Opportunity: -
 Stock prices may represent value and an opportunity to predict future
profit and growth.

10. REASONS FOR STOCK PRICES BEING A
LEADING INDICATOR
Two possible reasons why stock prices lead the economy are:
 Stock prices reflect expectations of earnings dividends and interest
rates.
 Stock market reacts to various leading indicator series, the most
important being
 Corporate earnings
 Corporate profit margins
 Interest rates
 Changes in growth of money supply

11. STOCK MARKET PRICE
INDICES

12.  Index are used to measure changes in stock prices of component
companies.
 It is used as a measure of the nation’s stock of capital, as well as a
measure of future business and consumer confidence levels.
 The stock index function as an indicator of the general economic
scenario of a country / region / sector.
 If the stock market indices are growing, it indicates that the
overall general economy of the country is stable and that the
investors have faith in the growth story of the economy.
 If, however, there is a plunge in the stock market index over a
period of time , it indicates that the economy of the country is in
troubled waters.

13.  Stock indices can be constructed –
 For the entire world ( Global Indices)
 For an entire continent ( Regional Indices – for example S&P Latin
America 40)
 For an entire country ( National Indices – for example Sensex &
Nifty for India )
 For a particular sector in a country – ( Sectoral Indices – for
example BSE BANKEX which tracks top banking companies in
India)
 For any other theme / group of economy / companies you want to
track. ( example Dow Jones Islamic world market index)

14.  STANDARD & POOR'S 500 INDEX - S&P 500
 An index of 500 stocks chosen for market size, liquidity and industry
grouping, among other factors. The S&P 500 is designed to be a leading
indicator of U.S. equities and is meant to reflect the risk/return
characteristics of the large cap universe.
Companies included in the index are selected by the S&P Index
Committee, a team of analysts and economists at Standard & Poor's. The
S&P 500 is a market value weighted index - each stock's weight is
proportionate to its market value.
 DOW JONES INDUSTRIAL AVERAGE – DJIA
 The Dow Jones Industrial Average is a price-weighted average of 30
significant stocks traded on the New York Stock Exchange and the
Nasdaq. The DJIA was invented by Charles Dow back in 1896.
Often referred to as "the Dow," the DJIA is one of the oldest and single
most watched index in the world. The DJIA includes companies like
General Electric, Disney, Exxon and Microsoft.

15.  BSE SENSEX: -
 The BSE SENSEX (SENSitive indEX)is a basket of 30 stocks
representing a sample of large, liquid and representative companies.
The base year of SENSEX is 1978-79 and the base value is 100. The
index is widely followed by investors who are interested in Indian stock
markets.
 NSE S&P: -
 The NSE S&P CNX Nifty 50 index – a well diversified 50 stock index
accounting for 24 sectors of the economy. While both SENSEX and
NIFTY would give you an overall direction of the stock market there are
other indices which track a particular sector.

16. INFLUENCING FACTORS OF
STOCK PRICES ON
ECONOMY

17.  There is broad consensus that stock market performance impacts
the economy.
• Persistent stock decline can be interpreted as the
indication of economic slowdown, lowering consumer
confidence and the business outlook which, in turn,
leads to lower consumption and investment spending
Confidence
Effect
• The more the companies rely on the stock market for
financing, the more they are held back by bear
markets.
Financing
Effect
• When the stock market is rising, investors are more wealthy
and spend more. As a result, the economy expands.
• On the other hand, if stock prices are declining, investors
are less wealthy and spend less. This results in slower
economic growth.
Wealth
Effect

18. RELATIONSHIP OF STOCK PRICES
WITH OTHER ECONOMIC
VARIABLES

19. INTEREST RATES, INFLATION AND STOCK
PRICES
 Not direct and consistent.
 Cash flow from stocks can change along interest rates, but it’s not certain
whether this change will augment or offset the change in interest rate.
 Interest rates are directly proportional to inflation.
 As there is Increase in inflation, RBI increases the interest rates in order
to reduce money supply and slow inflation down.
 The effect of interest rate changes on stock prices depends on what caused
the change in interest rate.

20. INFLATION
INTEREST RATE
COST OF PRODUCTION
PROFIT MARGIN
STOCK PRICES
(Decline Significantly)
PROFIT MARGIN
STOCK PRICES
(Stable)
Firms Not
Able To Cope
up With
Increased
Prices
Firms Able To
Cope up With
Increased
Prices

21. MONEY SUPPLY AND STOCK PRICES
 Money supply is one of the most basic parameters in an economy and measures the
abundance or scarcity of money.
 Stock prices tend to move higher when the money supply in an economy is high.
 Plenty of money circulating in the economy both makes more money available to
invest in stocks and also makes alternative investment instruments, such as bonds less
attractive.
 An additional reason stocks do well when the money supply is high is the increase in
general demand in the economy.
 When the borrowing rates are low, mortgage rates also decline, making homes more
affordable and increasing demand for such items as TV sets, washing machines and so
on. Car sales also go up when the financing rates drop.
 The lower rates partially trickle down to interest rates charged on credit card
purchases, and consumers purchase more of essentially every imaginable good and
service. The result is an increase in sales for most companies, which increases profits
and usually results in higher stock prices.

22. STOCK PRICES & IIP
 Industrial production is a coincident indicator.
 The reduced consumer spending leads to lower demand situation. The
producers respond by cutting down on the production. Low industrial
production results in lower corporate sales and profits, which directly
affects stock prices. So a direct impact of weak IIP data is a sudden fall in
stock prices.
 A continuous fall in overall IIP data may lead to many fundamentally
strong stocks being undervalued. This gives you the perfect opportunity to
invest in fundamentally strong companies at discount price.
 Growth in IIP numbers are good signs for cement and steel industries.
Mining Sector contributes approx 10% to the IIP. Growth figures can tell
us in advance about how mining and steel companies are going to fare in
coming quarters.
 IIP data is something that investors need to keep track. Indian stock
markets are very sensitive to IIP Numbers. A better IIP number would
show a positive growth on our Industrial production and stock markets
would possibly cheer.

24. FOREIGN EXCHANGE AND STOCK PRICES
 A weak foreign exchange value of the dollar should be conducive to rising
stock prices.
 A weak or depreciated dollar is associated with healthy export growth and
sluggish import growth because, as demand shifts from foreign-produced
goods to domestically produced goods, U.S. manufacturers benefit from a
depreciated dollar at the expense of foreign manufacturers.
 A weak dollar will make it more expensive for U.S. consumers and
producers to buy foreign goods, and some are likely to shift to
domestically produced goods, which are now lower priced.
 At the same time, consumers in other countries may find U.S. products
cheaper than their own products and shift their demand to U.S. goods.

25. RELIABILITY OF STOCK PRICES
AS ECONOMIC INDICATORS

26.  Stock market indices, gives a snapshot of how the economy is
going forward .It’s just a snapshot.
 “Stock market predicted 10 of the last 8 recession.”

27.  Looking at the above chart, it’s hard to believe that stock market is a valid
indicator.
 Starting in 1960 and using a decline of 10% as some sort of leading
indicator would have generated five false positives, one miss, and one
success.
 at the start of the 1991 recession the S&P was up over 10%, and at the
start of the 2001 recession the S&P was nearly flat.
 The S&P did not decline 10% before during or after the 1960 recession.
 In 1987 and 2003 the stock market declined nearly 20% but there was
no recession.
 Sources says, these false alarms can be cause of changes in some of
internal and external economic environment of the country.
 Timing: - Stock prices can determine future economic condition, but at
what time. Sources says, stock prices effect on economy can be seen in 1
week or max. 24 weeks.

28. INDIAN SCENARIO

29. INDIAN STOCK PRICES AND FOREX

30. INDIAN GDP AND STOCK PRICE
COMPARISON

31. INDIAN STOCK PRICES AND INFLATION
RATE

32. INDIAN STOCK PRICES AND INTEREST
RATES

33. COMPARISON OF INDIA US

35. COMPARISON OF INDIA AND
CHINA

37. CONCLUSION

38.  There is a considerable debate, on whether a systematic casual
connection exists between stock prices and general economic
conditions.
 Stock price movement appears to be valuable but infallible
leading indicator of business fluctuation, occasionally giving
false signals.
 Composite use of all LEI can be helpful in broadly examining and
predicting the economy of a country.