Market Fluctuations and Macroeconomics
Why do markets fluctuate?
To understand why markets fluctuate, we first need to understand the business cycle, a business cycle is a macroeconomic concept related to employment.
But what is macroeconomics anyway? If microeconomics is related to small-scale economic decisions and impacts, then macroeconomics is the study of national & international economies and markets.
Each quarter of the cycle ends with a Through, and each Through is characterized by conditions specific to its quarter, If we look at the end of the full recession Through (top of the cycle), it is mainly characterized by the supply of unemployment, unused equipment, and idle factories, and as the economy starts to expand, unemployed people find work, equipment gets utilized, and factories will start to have a pulse again, all of this causes raw material and available employees to be scarce, and production maxes out, the growth rate starts to slow down, here, the peak of the business cycle is reached.
Once the growth rate is maximized, labor and materials start to become less available, as a result, production drops and prices rise, and that’s when central banks raise interest rates to make borrowing money difficult, and this is to prevent inflation, as a result, sales numbers start to plummet.
It’s worth mentioning that certain industries thrive better than others in different phases of the business cycle, for example, financial services do well during early recessions, the energy sector thrives in early recovery and services thrive in full recovery while technology companies do well in full recession.
Economic Indicators
These are divided into three groups:
· Coincidental Indicators, such as GDP
· Leading Indicators, such as Unemployment
· Lagging Indicators, such as Employment
Coincidental indicator (GDP) can help you understand the current status of the economy, it is published on a quarterly basis and will indicate the phase of the business cycle the economy is at, leading indicators (Unemployment) predict the direction of the economy, if unemployment goes down, that is a sign that a recession is in order and things aren’t looking great while lagging indicators are post-fact, employment will not start to ramp up unless the economic recovery is actually happening.
Gross Domestic Products
GDP has 4 components:
· Investments: expenditure that is used to produce goods and services
· Consumption: food, clothing, tuition, household expenses
· Government spending: roads, bridges, health care, defense, military
· Net exports: Exported Goods minus Imported Goods
Households, Governments, and Enterprises have Expenditures and Income, one entity’s income is always another entity’s expenditure, so the GDP is calculated by the sum of all expenditures or the sum of all income (labor and capital) in an economy
GDP vs. Real GDP
GDP comes with a caveat, an increase in GDP YoY may not necessarily mean that production increased, it might simply reflect price increases or exchange rate altering, so the best way to get the actual GDP is actually calculating GDP while holding the price constant on a year-based prices.
Aggregate Demand Curve
We can use analysis tools like Aggregate Demand Curve to understand why the economy fluctuates.
The aggregate Demand Curve represents the economy’s total demand for all goods and services at different price points, there is an inverse relationship between price level and 3 out of the 4 GDP components, Government Spending is not affected by price fluctuations, however, consumption, investment and net exports are inversely proportional to price fluctuations.
