Fundamental analysis starts by looking at the economy because understanding how the economy is doing helps decide if the stock market is in a good position to grow or decline.
The idea is straightforward: when the economy grows, companies and industries benefit, and they expand. But, when the economy shrinks, companies face challenges. As a long-term investor, you should consider investing when the economy starts growing and pull back when it shows signs of slowing down.
Key Economic Factors to Consider:
- Political Stability: Political stability affects the economy, industries, and stock prices. Politicians create policies that impact the overall well-being of the people and economy. When the government is stable and makes good long-term decisions, the economy can grow smoothly. But, if the government is unstable or in constant change, it can slow down important reforms and investment.
- Gross Domestic Product (GDP): GDP is a measure of the value of all goods and services produced in a country. It shows how big and healthy the economy is. By comparing GDP growth rates over time, we can see if the economy is expanding or contracting. For instance, India’s GDP grew by 8.2% in 2017-18, but looking at data over several years gives a clearer picture of economic health.
- Index of Industrial Production (IIP): IIP tracks how much is being produced in industries like manufacturing, mining, and electricity. It’s calculated every month and helps economists see whether industrial activity is increasing or decreasing.
- Political Stability and Economic Development: A stable political situation ensures steady economic growth, while instability makes it hard to make good decisions or attract investment. In extreme cases, political problems can even cause economic crises.
- Communist Governments in Capitalist Economies: Sometimes, communist policies conflict with capitalist principles, and this can slow down growth in a capitalist economy.
- Global Impact: In today’s world, the political and economic stability of other countries also affects local markets, especially in large or emerging economies.
- GDP for Investors: GDP growth is important for investors. If GDP grows faster than expected, corporate profits rise, and so do stock prices. If GDP contracts, stock markets often decline.
- Industrial Production: IIP data helps track how industries are doing. Market analysts pay close attention to its growth rates to understand how healthy the industrial sector is.
This simpler explanation should help you understand the key factors affecting the economy and stock market decisions.