GDP and Investment Markets: Why Does This Number Affect the Stability of Your Portfolio?

When following daily economic news, many may notice that whenever important figures about the gross domestic product are announced, the stock market always experiences volatility. The SET Index responds to economic growth rates with significant movements. This correlation is no coincidence but a fundamental relationship that both novice and professional investors need to understand clearly.

GDP: An Unmissable Economic Indicator

GDP (Gross Domestic Product) refers to the total value of all finished goods and services produced within a country’s borders during a specified period. Whether from domestic companies or foreign companies operating within the country, GDP figures serve as a comprehensive measure that helps us understand whether the overall economy is expanding, stagnating, or contracting.

Typically, GDP is calculated annually, but many countries, including the United States, also publish quarterly GDP data so market participants can track short-term trends. Each release is adjusted to eliminate the effects of inflation and seasonal variations.

The Hidden Structure Behind GDP

GDP calculation follows a basic formula used worldwide in economics: GDP = C + G + I + NX

The four components that drive the economy

C - Private Consumption (Private Consumption)
Includes household expenditures on goods and services. Consumer spending is considered a pillar of GDP because when consumer confidence rises, people are more willing to spend. This boosts business activity, while low confidence signals caution about the future and a tendency to save rather than spend.

G - Government Spending (Government Spending)
The government allocates funds for infrastructure, equipment, and civil servant salaries. This public sector role becomes even more critical during economic downturns, as governments often increase spending to support the economy.

I - Investment by the Private and Public Sectors (Investment)
Companies utilize resources to purchase machinery, buildings, and other assets to increase production capacity. Investment directly impacts job creation and serves as a long-term confidence indicator for businesses.

NX - Net Exports (Net Exports)
Calculated by subtracting total imports from total exports. Countries with positive NX tend to perform well in the global market.

Nominal GDP vs. Real GDP: The Measurement Standards

Nominal GDP - Raw, unadjusted figures

Nominal GDP measures value using current prices in the measurement year. This figure can be distorted by inflation; if prices increase, Nominal GDP will appear higher even if actual output remains unchanged. That’s why Nominal GDP is used for comparisons within the same year, such as quarter-to-quarter analysis.

Real GDP - Adjusted for inflation

Real GDP removes inflation effects by using prices from a base year. Economists use this to compare actual production across different years. For example, if prices have increased by 5% since the base year, the GDP deflator will be 1.05. Nominal GDP is divided by this deflator to obtain an accurate Real GDP.

Generally, Nominal GDP tends to be higher than Real GDP because inflation is usually positive. A large difference between the two can indicate inflationary pressures or deflation in the economy.

GDP Index: Indicating the Economy’s Direction

GDP figures are used to compare the relative size of economies and to measure annual growth rates. When GDP increases, it indicates economic expansion, increased employment, and higher incomes. Conversely, two consecutive quarters of GDP decline signal a recession.

For policymakers, GDP data is a crucial signal for adjusting interest rates and other monetary policies. Therefore, waiting for GDP data often heightens market anticipation and volatility.

Why Investors Should Care About GDP

The relationship between GDP and the capital markets is undeniable. Listed companies generate revenue and profits from domestic economic activities. The components of GDP, including investment and consumption, directly feed into corporate earnings.

When GDP rises, companies tend to report higher profits, pushing stock prices up. Conversely, declining GDP signals reduced consumer spending, lower business investment, and shrinking profits. As a result, movements in GDP and the SET Index often trend in the same direction.

Smart investors recognize that looking at GDP alone is insufficient; it should be combined with other indicators such as unemployment rate, Consumer Price Index (CPI), and inflation rate to get a comprehensive view of economic health.

Key Takeaways About GDP

GDP is not a perfect measure of economic health but remains vital for:

• Assessing the size and growth of the economy broadly
• Formulating monetary policy by governments and central banks
• Forecasting future market trends
• Comparing economic strength across countries

A deep understanding of GDP reveals that this figure is a crucial piece in investment decision-making. To consistently profit in the capital markets, one must learn how these economic indicators influence the wins and losses of your portfolio.