How Macroeconomic Factors Affect Stock Returns

Examine How Macroeconomic Factors Affect Stock Returns

Abstract
There are many macroeconomic factors that affect the stock market globally. Inflation and
deflation have adverse financial effects on a company’s profitability which subsequently affect
the stock market. The rate of increment on the prices of goods and other services constitutes
inflation besides the increase in the cost of transportation and manufacturing expenses. (Swann,
2009) The stock market responds powerfully when the rate of inflation is low and weakens when
it increases as most companies reduce their expenditures because of high cost of goods and
services and the general money in economy reduces which results in reduced activities at the
stock market. (Jessica & Webber, 2001) Deflation in most quarters is regarded as a sign of a
weak economy as it also leads to a decrease in the stock market. (Chen, Roll and Ross, 1986)

Examine How Macroeconomic Factors Affect Stock Returns

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The interest rates are established and monitored by Federal Reserve Board. Higher rates of
interests are caused by the expensive nature of borrowing money. Money becomes too expensive
to borrow. To subsidize their high rates of interests, most companies may opt to lay off workers
and reduce expenditures on other goods. Higher rates of interests imply that even companies will
not be comfortable when borrowing as the rate of interests becomes exorbitant and their income
will also be affected. (Cairns, 2004) When the income of listed companies reduces then the
investments in the stock market is also affected negatively.

1
Sun Microsystems        
  PRC RET SHROUT WRETD
n 132 132 133 133
Mean 22.36021 0.001747 2447123 0.002766
Median 114.34 -0.08963 955344.5 -0.184
STD 34.098 0.16257 1201797 0.048607
Min 2.59 -0.39474 385583 -0.18462
Max 132.25 0.564103 3602000 0.110533
FRANKLIN ELCTRONIC
PUBLISHS

       
  PRC RET SHROUT WRETD
n 133 133 134 134
Mean 3.182147 0.013589 8063.91 0.003009
Median 9.445006 0.066578 8504.844 0.053974
STD 4.080006 0.21349 402.3438 0.053359
Min -3.845 -0.46429 7818 -0.18462
Max 11.9375 1.141434 8387 0.110533
SILICON GRAPHICS INC        
  PRC RET SHROUT WRETD
n 82 82 83 83
Mean 4.081159 0.025353 211362.6 0.003827

Examine How Macroeconomic Factors Affect Stock Returns

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Median 14.69741 0.253384 439218.6 0.012599
STD 14.06612 0.521925 57156.86 0.041823
Min 0.44 -0.54676 182872 -0.10253
Max 20.5625 2.782609 268272 0.083911
APPLE COMPUTER INC        
  PRC RET SHROUT WRETD
n 96 96 96 96
Mean 43.137 0.035008 438980.5 0.004941
Median 63.01375 -0.03415 498318.5 0.024586
STD 30.86698 0.056931 511806 0.019459
Min 14.14 -0.57744 136417 -0.10253
Max 135.8125 0.453782 860220 0.083911
UAL CORP        
  PRC RET SHROUT WRETD
n 51 51 52 52
Mean 36.4751 -0.05963 56649.73 -0.00232
Median 62.25 0.042932 74327 0.060554
STD 43.42343 0.187492 32795.61 0.019813
Min 0.84 -0.51765 49792 -0.10253
Max 80.75 0.326258 99506 0.083911
FORD MOTOR CO        
  PRC RET SHROUT WRETD
n 144 144 144 144
Mean 17.04726 0.009958 1961721 0.004096
Median 39.11375 0.054011 2270481 0.053095
STD 31.57055 0.00097 1599931 0.02086
Min 16.79 0.053325 1139159 0.038345
Max 63.9375 1.273764 3401803 0.110533

2. Independent variables are included as they determine or influence other variables. An
   independent variable when manipulated determines or influences the change in the other
   dependent variable. This study seeks to determine if a relationship exists between the returns of
   the stock market and the macro economic factors that may affect the overall performance of the
   stock market.
3. Ford Motor Co
   SUMMARY OUTPUT
   Regression Statistics
   Multiple R 0.4995218
   R Square 0.249522
   Adjusted R
   Square

0.244237

Examine How Macroeconomic Factors Affect Stock Returns

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Standard
Error

0.148835
Observations 144
ANOVA
  df SS MS F Significanc
e F

Regression 1 1.04585 1.0458
5
47.21
3
1.849E-10

Residual 142 3.14556 0.0221
5

Total 143 4.19142      
  Coefficient Standar
d error

t Stat P-
value
Lower 95% Upper
95%
Lower
95.0%

Upper
95.0%

Intercept 0.0029 0.0124 0.2290 0.819
2
-0.0218 0.0275 -0.0218 0.0275

VWRETD 1.7354 0.2526 6.8712 0.000
0
1.2361 2.2347 1.2361 2.2347

Franklin Electronic Publish Inc
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.31
R Square 0.09
Adjusted R Square 0.09
Standard Error 0.23
Observations 133.00
ANOVA

  df SS MS F Sig F
Regression 1 0.715 0.715 13.554 0.000
Residual 131 6.915 0.053
Total 132 7.631      
  Coeff Std Error t Stat P-value Lower
95%
Upper
95%

Lower
95.0%

Upper
95.0%
Intercept 0.0094 0.019955 0.47106 0.6383832 -0.03 0.048876 -0.03008 0.048876
VWRETD 1.5147 0.411416 3.68157 0.0003377 0.7008 2.328532 0.700776 2.328532

Examine How Macroeconomic Factors Affect Stock Returns

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UAL Corp
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.552
R Square 0.304
Adjusted R
Square

0.290
Standard Error 0.156
Observations 51.000
ANOVA
  df SS MS F Sign f
Regression 1 0.521 0.521 21.442 0.000
Residual 49 1.191 0.024
Total 50 1.712      
  Coeff Std
error
t Stat P-
value
Lower
95%
Upper
95%

Lower
95.0%

Upper
95.0%

Intercept -0.052 0.022 –
2.372
0.022 -0.096 -0.008 -0.096 -0.008
VWRETD 1.933 0.418 4.631 0.000 1.094 2.772 1.094 2.772

4. Interpretation
   Ford Motor Co.
   The thesis of the study is to establish if a relationship exists between the performance of
   individual stocks belonging to different companies and the performance of the stock market and
   if the stock market can be affected by macroeconomic factors such as real GDP growth,
   inflation, interest rates or unemployment.
   P-Value – 0.8192 It indicates that the significant relationship between the returns of the market
   and the performance of the markets index is very low.

Examine How Macroeconomic Factors Affect Stock Returns

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Coefficient – 1.7354 The slope is of the graph is positive which indicates that the stock returns
increases relatively to the increase in the stock index.
R square – 0.2495 The R square measures the strength of the relationship, how strong or weak
the relationship is. In this case we can conclude that the variability of the stock market index
explains only 24.95% of the stock returns.
Franklin Electronic Publish Inc
P-Value – 0.6383 It indicates that the significant relationship between the returns of the market
and the performance of the markets index is very low.
Coefficient – 1.514 The slope is of the graph is positive which indicates that the stock returns
increases relatively to the increase in the stock index.
R square – 0.09 The R square measures the strength of the relationship, how strong or weak the
relationship is. In this case we can conclude that the variability of the stock market index
explains only 9 % of the stock returns.
UAL Corp
P-Value – 0.022 It indicates that the significant relationship between the returns of the market
and the performance of the markets index is very low.
Coefficient – 1.933 The slope is of the graph is positive which indicates that the stock returns
increases relatively to the increase in the stock index.
R square – 0.304 The R square measures the strength of the relationship, how strong or weak the
relationship is. In this case we can conclude that the variability of the stock market index
explains only 30.4% of the stock returns.

Examine How Macroeconomic Factors Affect Stock Returns

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The Relationship Between RET and WRETD

FordUALAppleSiliconFranklinSun
micro

-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06

WRETD
RET

My findings that are based on the graph above indicate that there is no relationship between the
returns on the stock market and the general performance of the stock index. My predictions were
that the relationship that exists between the stock market and the performance of the individual
stocks is very limited.

5. My investment strategy would be to invest as per the performance of the individual company
   stock and not the general performance of the stock market.

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References
Cairns, J (2004). Interest Rate Models – An Introduction. Princeton University Press.
Chen, N., Roll, R. and Ross, S.A. (1986) Economic Forces and the Stock Market. Journal of
Business.
Jessica. J. & Webber, N. (2001). Interest Rate Modelling. John Wiley & Son

Sullivan , Sheffrin, S (2003). Economics: Principles in action. Upper Saddle River, New Jersey
Pearson, Prentice Hall.

Examine How Macroeconomic Factors Affect Stock Returns

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Swann, C. (2009) “GDP and the Economy – Advance Estimates for the Second Quarter of
2009,” Survey of Current Business, August 2009.