Economic Indicators Impact on Different Stock Categories - Essay Example

This difference is important to understand as it impacts not only businesses and investors but also governments in their policy formulation. This paper, therefore, aims to study whether different economic indicators influence large and small-cap stocks by looking to answer the question: The key research question explored the relationship between economic indicators and stock prices of small-cap and large-cap companies in the US  using available data for the last 10 years (from Jan 2001 to June 2011) based on 9 leading economic indicators and on two stock indices (one each for large and small-cap stocks). The economic indicators were the independent variables while the stock price was the dependent variable in the multiple regression models developed for the two stock indices. Using public records, data were collected from publicly available financial statements of corporations.  The proposed relationships were tested through regression analyses.  Results indicated that the two stock categories are influenced by a different set of economic indicators except for the Consumer Price Index, the Industrial Production Index (IPI), and the Consumer Confidence Index. The implication for economic change includes governments’ awareness of the need to monitor these factors as their Key Performance Indicators for measuring the impact and success of their past and future economic policy decisions on businesses.

The release of data pertaining to economic indicators is always eagerly awaited by investors. These indicators include unemployment, consumer price index (CPI) and/or inflation, and even housing starts. At the same time, central bank changes in interest rates are also anxious moments for stock market investors. It is not uncommon to see immediate swings in the stock markets following the release of economic data for the country.

1.1        Background and Context

There are, however, hundreds of economic indicators available/released regularly. While every indicator is an important measure of a facet of the economy, do all of them influence the stock markets equally? Quite naturally, correctly anticipating the economic indicators and being on the “right” side of the market can prove to be extremely profitable for an investor. Hence the importance to know is which of these indicators influence the stock markets most, and probably more importantly, which economic indicators most influence which types of stocks. Also, a revelation from research that small-cap stocks are indeed influenced differently and/or by a different set of economic indicators than those for large-cap stocks could have significant implications for governments especially in formulating their economic policies with regard to small-cap companies and even start-ups in the country.

Objectives

The objective of this research is to verify whether different stock categories are influenced differently by economic indicators. That is, do some economic indicators influence the stock prices of both large and small-cap stocks? The hypothesis tested in the research is:

• Small-cap stocks are not influenced by the same set of economic indicators as large-cap stocks in the US

This hypothesis is based on the observation that over time different categories of stocks give different returns.