Learning about the role that macroeconomics plays in the financial markets is an essential step toward improving your investing and trading. Recap the key elements that were covered in the macroeconomic course and refresh your knowledge about economic factors, market cycles and regional macroeconomic characteristics.
What is macroeconomics?
Macroeconomics refers to the study of high-level economic and political factors, and the impact they might have on the financial markets. Macroeconomics involves compiling and analyzing diverse datasets, and utilizing them to provide insights into the current and future state of the economy.
Macroeconomics is important because it influences levels of supply and demand within the wider economy.
What are macroeconomic factors?
As part of the course, you will have learned that economic factors are variables that can impact individuals, businesses and the overall economy. Some macroeconomic factors are decided by governments and central banks, such as tax rates, and fiscal and monetary policies. Other macroeconomic factors, which are not as heavily influenced by policy makers, include consumer spending and business confidence.
Four of the most important macroeconomic factors include:
- Interest rates
- Inflation
- Economic growth
- Employment levels
How do markets work?
You should also understand that markets tend to work in cycles, fluctuating between positive and negative periods of economic growth. Gross domestic product (GDP) is used to measure the market value of the goods and services produced by a country within a specific time period, and is the primary tool used to measure the current health of an economy.
Economic growth fluctuates between the following stages:
| Expansion | Peak | Recession | Trough |
|---|---|---|---|
| Increased output by most economic sectors, which causes employment levels, consumer spending and business investment to grow. | Spending, investment and employment rates start to slow down, but remain positive. Inflation may accelerate. | GDP declines following lower spending, investment and employment levels. | GDP stops falling and starts growing, leading to renewed consumer and business confidence, which causes increased spending. |
How do economic cycles impact stock sectors?
Different stock sectors will perform differently throughout the economic cycle. For example, defensive stocks, such as large blue-chip companies, have historically demonstrated a reduced response to broader economic changes. On the other hand, cyclical stocks have a proven correlation with the underlying economy, and tech stocks are highly sensitive to market and investor sentiment.
Regional differences in macroeconomics
Finally, it is important to remember that macroeconomic characteristics will differ between different regions:
- The US: The US is the world’s largest economy, so US-based events will likely impact the rest of the world.
- Europe: Europe offers relative financial stability compared to other markets. It also benefits from having established wealth.
- China: China has seen significant GDP growth over recent decades, but international investors are often wary of the country’s high levels of state intervention.
- Japan: Japan has historically been a net exporter of goods and services, and its market economy is more closely aligned with the US and Europe than with China.
Now that you have finished the macroeconomics course, consider revisiting any of the course materials, testing your knowledge or starting to invest on eToro!
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