What Moves A Stock: Part VI
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What Moves A Stock: Part VI

Macro Influences

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What Moves A Stock: Part VI
Dreamstime.com

Macro conditions in world economies play a direct role in the direction U.S. stocks are heading. With our domestic economy becoming increasingly interconnected into a much more global economy, events that happen in foreign nations usually have a direct linkage to American firms. Two prime examples of direct linkage and American firms’ exposure to foreign nations are the continent of Europe and China.

European leaders believed unifying Europe under one currency would be optimum for creating a strong economy and promoting economic growth among the member nations. During this period, the American economy was suffering from a slowing and perhaps persistent sluggish economy, which meant Europeans needed to bolster their own economies in an effort to avoid becoming dependent solely on the U.S. economy. Two specific American industries that benefitted from the euro were the banks and industrials.

For banks involved in international investing like J.P. Morgan and Goldman Sachs, significant exposure to Europe was incurred. Increased exposure meant these banks took the brunt of crises that emerge in the financial system. Banks involved with Europe were exposed to European borrowers, European banks, and even bonds of European nations. Whenever a nation was on the brink of default, banks with exposure to this market took hits to their stock prices. Even banks who were completely domestic to the U.S. and had absolutely zero international exposure to Europe would see their price fall due to the role ETFs and sector gravity play on stock prices.

China also plays a critical role of how well the stock market is performing due to how interconnected the U.S. and China economies are. China continues to move away from rural economies to urban economies, which boosts well for American companies. Even if China starts to slowdown, the growth opportunity available for American companies is still vastly more than what they can receive in other already established markets throughout the world.

Industrial plays are the obvious biggest benefactor of a growing Chinese economy and middle class. As China cities continue to grow, industrial companies like Caterpillar and Deere, Co. should receive more attention in the market. In addition, slowdowns in the Chinese economy will also serve as a detriment to industrial stocks due to their dependence on Chinese economic growth. Oil companies like Chevron and Exxon and copper companies are also becoming increasingly dependent on China. Technology companies who thrive under economic growth, like General Electric, can now be regarded as terrific growth companies in China rather than America.

The Chinese middle class is growing at the fastest pace in their nations history. Thus, companies that are consumption oriented, Yum! Brands, McDonald’s, Nike, and Starbucks should their future earnings and valuations soar higher on the hopes of the Chinese middle class increasing their consumption. Investors should still be wary of political concerns in China since the nation is still communist run and can dictate at any moment what Chinese consumers can purchase.

Chinese ability to export commodities and other products onto the global markets can adversely affect American companies. The Chinese have essentially decimated U.S. steel production because of their steel pumping into the market, causing steel prices to fall. Although Chinese steel is considered not the best of quality in comparison to American steel, the fact China can manipulate market prices through sheer supply and demand can leave investors wary of American companies’ future stock prices.

Both China and Europe are just two macro plays that are influencing stock prices both positively and negatively. Other macro factors like emerging markets and the Middle East should continue to be monitored and assessed when creating a portfolio. Since the world’s economy is more interconnected than any other point in history, monitoring both domestic and international news is of importance for investors.

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This article has not been reviewed by Odyssey HQ and solely reflects the ideas and opinions of the creator.
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