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Top 5 factors affecting US stock market

U.S. stock market  is covered by the two stock exchanges i.e. NYSE and NASDAQ. NYSE, sometimes also referred as “Big Board” is world’s largest stock exchange having market capitalization of US $19.6 trillion as of November 2016. NYSE is three times larger than NASDAQ and these two U.S. stock exchanges together have greater market capitalization than the world’s next ten stock exchanges combined. There are many factors which affect the performance of U.S. stock market .Let us discuss the 5 major factors which influence the returns of U.S. stock market the most.

Fed Policy

Federal Reserve policies play an important role in determining the market performance. A very strong and consistent relationship has been found among the Fed’s monetary policy and securities’ return over a span of 50 years. The equity markets perform best during the periods of expansive monetary policy, perform poorly during restrictive policy and perform moderately during the time of indeterminate or neutral monetary policy. These three classifications of monetary policy is the result of different combinations of changes in discount rates and changes in federal funds rates.

Fed’s policies affect the investment styles. At the time of restrictive monetary policy, investors tend to invest more in commodities and less in equity markets. Moreover, the monetary policy also has a large influence over the returns of different sectors of market. For example, retail, apparel, autos and construction sectors perform best during expansive policy whereas food and utilities sectors perform well during the restrictive period.

Crude Oil Prices

Another major factor, which largely determines the performance of U.S. stock market, is the prices of crude oil and the difference among the Brent and WTI prices. The integrated oil & gas sector and oil & gas equipment & services sectors have a significant portion in the total market capitalization of U.S. stock market. In 2015 when the oil prices reached to the historical lowest levels due to a glut, many oil companies could not withstand the scenario and went out of the market. While the other market players faced poor financial results. As a result, these companies took many strategic decisions like divestitures and did restructuring on massive scale to cut their costs.

Besides the oil & gas producers and oil & gas equipment & services providers, many other sectors are also affected by changes in oil prices. Lower oil and gasoline prices increase the spending power of consumers due to which retail, food and some other sectors perform better.

Chinese Economy

The financial activity of world’s second largest economy significantly affects the U.S. stock market returns. China is the largest export partner while third largest import partner of U.S. now as the Chinese economy is reaching towards its maturity phase and the Chinese Government has reduced its GDP target, it will adversely affect the U.S. stock market especially the returns of commodities, organic chemicals and plastic sectors.

U.S. stock market  is covered by the two stock exchanges i.e. NYSE and NASDAQ. NYSE, sometimes also referred as “Big Board” is world’s largest stock exchange having market capitalization of US $19.6 trillion as of November 2016. NYSE is three times larger than NASDAQ and these two U.S. stock exchanges together have greater market capitalization than the world’s next ten stock exchanges combined. There are many factors which affect the performance of U.S. stock market .Let us discuss the 5 major factors which influence the returns of U.S. stock market the most.

Fed Policy

Federal Reserve policies play an important role in determining the market performance. A very strong and consistent relationship has been found among the Fed’s monetary policy and securities’ return over a span of 50 years. The equity markets perform best during the periods of expansive monetary policy, perform poorly during restrictive policy and perform moderately during the time of indeterminate or neutral monetary policy. These three classifications of monetary policy is the result of different combinations of changes in discount rates and changes in federal funds rates.

Fed’s policies affect the investment styles. At the time of restrictive monetary policy, investors tend to invest more in commodities and less in equity markets. Moreover, the monetary policy also has a large influence over the returns of different sectors of market. For example, retail, apparel, autos and construction sectors perform best during expansive policy whereas food and utilities sectors perform well during the restrictive period.

Crude Oil Prices

Another major factor, which largely determines the performance of U.S. stock market, is the prices of crude oil and the difference among the Brent and WTI prices. The integrated oil & gas sector and oil & gas equipment & services sectors have a significant portion in the total market capitalization of U.S. stock market. In 2015 when the oil prices reached to the historical lowest levels due to a glut, many oil companies could not withstand the scenario and went out of the market. While the other market players faced poor financial results. As a result, these companies took many strategic decisions like divestitures and did restructuring on massive scale to cut their costs.

Besides the oil & gas producers and oil & gas equipment & services providers, many other sectors are also affected by changes in oil prices. Lower oil and gasoline prices increase the spending power of consumers due to which retail, food and some other sectors perform better.

Chinese Economy

The financial activity of world’s second largest economy significantly affects the U.S. stock market returns. China is the largest export partner while third largest import partner of U.S. now as the Chinese economy is reaching towards its maturity phase and the Chinese Government has reduced its GDP target, it will adversely affect the U.S. stock market especially the returns of commodities, organic chemicals and plastic sectors.

Elected Party

The ruling party in the USA also affects the US stock market. This happens because; both democratic and republican have different political and economic policies. The historical data shows that stock market performs better during Democratic rule compared to Republicans rule. The Dow Jones Industrial Average generated an average return of 82.7% under Democrats whereas 44.7% under Republicans.

Consumer Spending

Consumer spending is considered the key driver of economy and GDP growth. Therefore, this factor considerably affects the returns of consumer goods, retail, autos, food, home décor and some other sectors of U.S. stock market.

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About Emaad Qureshi