Some economic factors such as interest rates, inflationary trends and GDP growth have an underlying effect on the overall stock market, and to some extent, all individual companies. Depending on the company's type of business, some factors can have a bigger affect than others. After getting a sense of the trends in macro-economic factors, many traders look at individual industry groups and consider factors that will impact a specific industry more heavily than others before buying a stock within that group.
For example, a decline in interest rates maybe expected to have a greater and more direct effect on financial stocks and utilities than on certain other industries such as health care or energy.
Broad industry groups
There is no “standard” set of industry groups. However, many firms such as Standard & Poor’s and Dow Jones create industry group indexes by classifying certain companies as belonging to a particular group based on their primary business. In addition, different brokerage firms and software tools may also use slightly different names to designate certain sectors. For example, Schwab uses the Standard & Poor’s GICS sectors and tracks indices for the following broad industry groups:
Broad industry groups
|Health Care||Consumer Staples|
You can probably think of companies that would fit into each of these broad industry groups. You can probably also think of certain economic factors that might impact one of these industry groups more than others. For example, factors that affect the Health Care industry may be different than those affecting the Oil & Gas industry.
Beneath these broad industry groups are other narrower groups with a greater focus on one specific segment of the industry in question. For example, under the broad Energy Industry Group, the Schwab.com stock screener also breaks out the following sub groups:
Segment and industry groups: oil & gas
|Coal & Consumable Fuels Consumable||Oil & Gas Storage & Transportation|
|Integrated Oil & Gas||Oil & Gas Drilling|
|Oil & Gas Exploration and Production||Gas & Oil Equipment & Services|
|Oil & Gas Refining & Marketing|
It is fairly obvious that there is a difference between a company that operates pipelines and one that is involved in Alternative Energy. Here, too, we find areas where traders can seek information unique to a specific segment of a given broad industry group.
Fundamental factors that affect broad industry groups
In order to illustrate the difference in economic factors that affect various industry groups, let’s look at a small handful of industry groups and some fundamental factors that may affect the stocks in that group. This discussion is not meant to be comprehensive nor imply a recommendation of the specific Industries mentioned.
Fundamental factors affecting the oil & gas industry group
The key fundamental drivers in the Oil & Gas business are the price of crude oil and natural gas. Typically higher prices are better for the stocks in this industry, although this can vary depending upon whether a given company already owns certain quantities of oil and gas or if they have to go out and acquire it. Currency fluctuations are a key consideration for many multinational crude oil and natural gas companies as well. Transportation costs can also be a factor for companies that are involved in physically moving energy related products and commodities. Finally, the rise of alternative forms of energy – which can lessen the demand for traditional forms of energy - is now a factor in assessing the outlook for more traditional oil and gas energy producers.
Fundamental factors affecting the healthcare industry group
In general, companies involved in the healthcare industry fall into one of several categories:
- Those that provide products (such as drugs or surgical equipment)
- Those that provide services (hospitals, doctors, nurses, clinics)
- Those that provide insurance to cover health care costs
With the passage of the Affordable Care Act in 2010, the role of government influence in the health care industry in the U.S. has added a new factor for traders to consider. How that role will affect health care companies is something that will evolve over time and ultimately, health care related companies will have to adapt. Nevertheless, while the specific nature of the economic factors that affect these companies may change, the basic fundamental model will remain roughly the same.
Medical products providers will still need to invest in Research & Development. They will also need to seek approval from government agencies in order to market new products and must still charge enough for their products and contain their costs enough to generate a profit.
Those providing medical services will still operate under the laws of supply and demand. They will generate profits based on the number of patients they treat, the prices they charge to treat patients, and the costs they incur in running their operations.
How health insurance companies will be impacted is something that a trader should carefully consider before investing in companies engaged in this segment of the health care industry.
Fundamental factors affecting the technology industry group
Fundamental changes in the technology industry – more so than many other industries – evolve very quickly. The key to evaluating an individual technology company is to assess its ability to adapt to the changing tech landscape. The key to evaluating the fundamental factors for the overall industry group is to consider what new technologies will provide the driving force over the next several years. Another fundamental consideration is the expected lifespan for any existing technological product or service. In a similar vein, technology companies that can charge recurring subscription or renewal/maintenance fees may hold an advantage over companies that sell their technology products one at a time.
Other factors include the pricing power of technology firms. Historically a company that first creates a new technology could charge a premium price as buyers would flock to the newest, latest and greatest technological tool. In more recent history however, the competition among tech firms has become fierce and when a new technology emerges a number of firms attempt to create similar products to compete and to gain market share in that category. Ultimately, this ramped up supply often leads to lower prices. As a result a company may face a lot of competition to sell its product and may not be able to charge as high a price as they would like.
An old investment adage states that “it is not a stock market, but a market of stocks.” The point of this statement is simply that stock investors ultimately select individual stocks that go up in price in order to succeed. However, it can also be stated that “it is a market of industries”, with any number of companies competing within a particular industry. So another tool that fundamental traders can add to their toolbox is to go beyond simply looking at a single company in isolation. A trader can consider not only the macroeconomic factors that affect the overall business environment, but the fundamental factors that directly impact the industry group in which a given company competes. This additional knowledge can give a trader an edge over other less informed market participants.