Economic Policies

The governmental economic policy affects the stock exchange quotations, so those measures that make the gross domestic product (GDP) grow or that will favor the investors will have immediate positive effects on the stock exchange markets.

The GDP is the sum of the value of all the goods and final services produced in a country in a lapse of one year usually, the evolution of the GDP has complete cycles that last between 7 and 15 years, between the beginning of the recession and the ending of the expansion.

In the phases of economic recession, in which the growth of the GDP is reduced, the stock exchange market is also usually in recession. But when the GDP begins to grow, the stock exchange market enters into a very important expansion phase. Also, usually, the falling of the stock exchange markets precedes the reduction in growth of the GDP. For it, it is usually thought that the stock exchange markets help to tell when there are going to be changes in the evolution of the economy.

In the last decades, these cycles began the stock exchange crack of 1973 and the oil crisis of that same year. In 1977, the economy started to recover lasting until 1987. In 1987, a stock exchange crack happened and the growth of the GDP started to decrease. Recession lasted until 1993, moment in which the economy began a long expansion period that lasted until the year 2000.

The beginning of the recession phases are characterized by facts such as the high types of interests, high inflation, anti-inflation measures taken by the government that tries to reduce the speed of the economy, the increasing of the lack of payments of the debts from part of the companies as consequence of their excessive state of indebtedness, credit restriction from part of the banks to control the indebtedness among others.

The beginning of the expansive phases are characterized by the reduction of the interest rates, low inflation, government measures to increase the economic activities, reduction of the indebtedness increase of the credit facilities from part of the banks, among others. Among the measures that can be positive for the GDP and for the interests of the investors, the following are the most outstanding:

  • measures that will favor the obtaining of earnings from part of the companies
  • privatizing of public companies
  • measures that will reduce inflation
  • reduction of public deficit, due to the measures to reduce inflation
  • reduction of interest rates
  • liberalization of foreign investments in the country
  • concession of fiscal advantages for the stock exchange investments
  • freedom, in the dividends policies for the companies that are quoted in the market

On the other hand, there are government measures that could negatively affect the stock exchange markets. As an example the following:

  • hardening of the fiscal measures for the investors
  • increasing of the tax rate over the earnings of the companies, due the possible dividends to distribute are reduced
  • restrictions in the dividend policies of the companies
  • nationalization of companies
  • measures that will imply an increase on the rate of inflation
  • increasing of the public deficit, due to the implications of inflation measures
  • rising of interest rates
  • low prices policies for those companies in which the sale prices are regulated by the government, due that they reduce the earnings that can be obtained by these companies. Anyway, due that this reduction of prices will benefit the clients of these companies. They can increase the earnings of the companies that are clients of the regulated companies.

Trustworthy indicators
Trustworthy indicators are used to measure the trust of businessmen. These indicators inform about what businessmen and consumers think about the situation and of their perspectives of the current economic situation. Often, these indicators anticipate the economy’s evolution.

The most trustworthy and known indicators are prepared by:

  • United States: 
    University of Michigan and the Conference Board
  • Germany: 
    Institute of Economic Studies of the University of Munich      (DFO Index)
  • Japan: 
    Bank of Japan (Tankan Index)

These indicators reflect the evolution of the trust of businessmen and consumers in relation with the outgoing of the company.

Beginner Money Investing Analysis of the Economic Juncture & of the Moment Types of Interest Market Inflation Economic Policies Psychology of investors and other aspects that affect the stock exchange climate Market Variations Summary