Executive Summary – Headwinds are factors or events that slow down the economic growth or bring a negative effect on investments and stock markets. Tailwinds are factors or events that help progress. Factors such as company revenue and profitability, political situation in the country, world macro economic factors and industry and sector performance can present themselves as headwinds or tailwinds that affect stock market valuations and investing mood.
Natural disasters or poor rain are headwinds that affect the economy's growth and thus have a negative effect on the stock market. Increased consumer spending is a tailwind for the economy as it means more demand leading to higher revenue and profits for companies which means a positive effect on stock markets.
Revenue and Profitability of the Company – If a company shows growth in revenue and profitability or potential growth in revenue and profitability, it will be a tailwind for its valuation. People will perceive value in the stock and invest money in it or buy shares of the company. If there are tough times for companies, these headwinds will reduce people's interest to invest in the stock. For example, when crude oil prices fell, the stocks of upstream oil companies underperformed as people expected reduced profitability of these companies which means lesser growth in value and lesser dividends. But at the same time, a headwind for one sector can be a tailwind for another. For example, the same condition of falling crude oil prices can affect FMCG companies positively that use crude oil derivatives as raw materials. Production costs will go down leading to increased profitability. Such stocks have potential to do better in the stock market.
Headwinds are factors or events that slow down the economic growth or bring a negative effect on investments and stock markets. Tailwinds are factors or events that help progress.
World Macroeconomic Factors – The world is quite interconnected today and factors in one part of the world can affect other parts. For example, when there was a recession in US, it was a headwind for stock markets in India that were affected negatively. The drop in oil prices led to lesser spending in fuel freeing up more money for spending in other areas. Changes in demand in developed nations, credit rating by international agencies etc. are global factors that can act as headwinds or tailwinds depending on how they affect the investing mood and stock markets in the country.
Market – The market itself also provides impetus to a stock or stops growth. If it is a bull market, most stock prices appreciate. In a bear market, the value of stocks comes down. If the sector or industry that the stock belongs to is on a decline, chances are that the particular stock also reduces in value and vice-a-versa.
Understanding headwinds and tailwinds is important to understand the stock market movements and people's investment strategies.