What Moves the Stock Market
Why the Stock Market Rises and Falls
What moves the stock market?
That complex question has many answers. Some market movers are
obvious, while others creep up on us unseen. In this and subsequent
articles, Ill look at some of the economic, political, and societal
issues that may cause the market to change direction or speed up or
slow down its momentum.
A quick list of the obvious includes:
Inflation
Interest rates
Earnings
Oil/Energy Prices
War/terrorism
Crime/fraud
Serious domestic political unrest
As you can see, many of these have serious long-term implications,
while others may only cause temporary disruptions.
However, the one factor not listed above that drives the market
absolutely crazy is uncertainty. The market cannot stand surprises and
when there is the chance that something may change, it rattles the
market.
There is a theory that our stock markets are efficient, meaning that
everyone has access to the same information at the same time. Of
course, this is not true, but in a broad sense, the market taken as a
whole expects to know about events and news in time to absorb them.
For example, if the Federal Reserve Boards Open Market Committee (the
Fed) expects to raise interest rates by one-quarter percent at its
next meeting, the market will absorb and factor that rate increase
into prices before the committee meets. If the committee follows
through as expected, there is usually little or no market response.
However, if the Fed raises interest rates by one-half percentage point
instead, the market will probably react abruptly.
Surprising economic news, war or terrorism, and other unexpected
events disturb the markets sense of control and often send it in a
tailspin. Of course, really good news can cause a big bump in prices,
but it seems like these days its bad news that captures most of the
headlines.
What Does this Mean to You?
For most investors, these market bumps are just that temporary bumps
that soon smooth out. However, you need to be aware of the factors
that move the market, since they can create opportunities as well as
problems.
If you have had you eye on a stock, but felt it was a little
over-priced, one of these market events might just take enough wind
out of its price to put it in your buy range.
On the other hand, if you need to sell, watch for earnings reports,
Fed meetings, and other predictable events that might shave some
points off your stock.
