Why Macroeconomic Factors Are Not Important for Long-term Stock Market Investors? Check the Top 8 Reasons

Based on a recent study conducted by researchers from the University of St. Andrews, it has been established that there is a weak or inconsistent relationship between macroeconomic factors and long-term stock market trends.

To reach this conclusion, the research specifically analysed the impact of various macroeconomic variables like industrial production, consumer price index (CPI), money supply, and interest rates. The findings suggest that long-term stock market investors should not consider macroeconomic factors while making investment decisions. For more clarity, let’s study the top 8 reasons highlighting the same.

• Macroeconomic factors like inflation and interest rates have inconsistent effects on long-term stock prices.
• Long-term stock market investors should not analyse economic conditions as they can give inaccurate predictions of stock market performance.
• Ideally, they should focus on company fundamentals, such as earnings, dividends, growth potential, and more.

The relationship between macroeconomic variables (e.g., inflation, interest rates) and stock prices is “not stable”. Sometimes, they may have a strong influence on stock prices, while at other times, their impact is minimal. Also, the influence of these variables differs between countries.

For example, in the US, inflation negatively affects stock prices, while in Japan, this relationship gives a different result. This makes macroeconomic variables less useful for long-term stock market investors.

Stock prices are more closely related to:

• Corporate earnings
  and
• Dividends
   

They are less influenced by broader macroeconomic variables. For example, in Japan, stock prices generally increase when industrial production rises. This happens as higher production signals stronger corporate earnings and more dividends for shareholders.

However, factors like money supply (how much cash is circulating in the economy) and inflation (CPI) showed weak or inconsistent effects on stock prices over the long term.

In the study conducted by researchers from the University of St. Andrews, it has been observed that changes in money supply do not significantly affect long-term stock prices. Be it through adjustments in interest rates or money supply by central banks—these policies do not consistently affect long-term stock market trends.

Hence, long-term investors cannot accurately predict how much such policy changes will influence stock prices.

While inflation can influence stock prices in the short term, its long-term effect is inconsistent. For example, the study clearly shows that in Japan, inflation only indirectly affected stock prices, while in the US, the relationship between CPI and stock prices was negative but not dominant.

Long-term interest rates, such as “bond yields”, are only “weakly related to stock prices”. The study states that in Japan, the official discount rate had little to no influence over stock prices. This reduces the relevance of macroeconomic interest rate policies for long-term investors.

Macroeconomic variables might influence short-term stock price fluctuations, but their long-term effects are negligible. Thus, long-term investors should instead focus on:

• Company fundamentals
  and
• Long-term market trends
   

They should avoid reacting to short-term changes in economic indicators like inflation or interest rates.

During Japan’s economic downturn in the 1990s, the country faced the situation of a “liquidity trap”. For the unaware, it represents a scenario where interest rates were near zero but failed to stimulate the economy.

As a result, the government intervened and led to changes in monetary policies, interest rates (to control inflation), and money supply. However, nothing worked and did not boost the stock market. Despite significant efforts to revive the economy, stock prices did not recover as expected.

This clearly shows that macroeconomic factors, such as government interventions or economic conditions, do not always influence stock market performance, especially over the long term.

Stock market movements are more influenced by how investors feel and behave rather than just macroeconomic data like inflation or interest rates. It must be noted that the following behavioural factors have a stronger impact on long-term stock prices:

• Investor sentiment (optimism or fear)
• Corporate earnings reports
• Innovation cycles (new technologies or products), and more
   

Since economic data can be inconsistent in predicting the market’s performance, long-term investors should focus on understanding a company’s financial health and growth potential. These factors provide a better projection of future stock performance.

If you are looking for safe investment option, then you can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.85% p.a.