PLEASE CLICK HERE TO SUBSCRIBE TO MY YOUTUBE CHANNEL @MoneyWithJames
#Money #Education #StockMarket #RealEstate #Learning #Finance #Investing #Learn #Wealth
Questions Answered in Today’s Post and Video
1) Why do stocks go up and down?
2) What sort of data should you follow when investing in individual stocks?
3) Why do expectations matter more than actual numbers?
4) What is the importance of market sentiment?
So why do stocks go up and down? If you are just here hoping for a quick answer to this question, well here it is… they go up and down for every single reason you can think of. Yep! An almost endless list of reasons, but if you read on I will explain what I mean by that.
So clearly everyone who follows stocks, and especially those curious about the stock market, can’t go a day in the market without asking why did this or that stock go up or down by that much today. In most cases, there is a reasonable answer to that question that will explain the majority of the move. The key issue for most of us is how quickly YOU, as a stock investor, can find the answer to this question and then use that information to your advantage.
Now clearly, I have to mention the obvious, the reason stocks go up is because there are more buyers than sellers and vice versa, stocks go down because there are more sellers than buyers, but that is the most simplistic answer. So… the real question behind that is why were there more sellers or buyers today?
So let’s answer the main long-term fundamental reasons…
Reason 1 – fundamental company information was released. News about earnings, revenue, debt levels, and big management decisions affecting the future direction of the company or even changes in management themselves (a new CEO, for example) all affect investor’s views. As I’ve mentioned before, companies officially announce this type of information quarterly during the four quarterly earnings seasons (roughly early feb/may/aug/nov) but they also sometimes pre-announce earnings (a profit warning for example) or occasionally make other material announcements throughout the year.
On the topic of earnings, most would think strong earnings typically means more demand for the company’s products or services and then growth in the stock price occurs and vice versa, poor earnings and investors sell and the stock price goes down. This is certainly what ChatGPT and other answer engines will tell you… BUT… if you have ever watched an earnings release and seen great profits announced to only then see the stock go down or vice versa you will know this is nowhere near a rule to follow. The actual answer is…
Reason 2 – future expectations, so what actually matters is fundamental company performance RELATIVE to what all the existing investors are expecting at that moment for the future of that company. Are earnings expected to rise by 10% or just 2% or perhaps 30%? So before an earnings release this is often called the whisper number or the consensus number or more generally the market’s expectations. So reason 1, fundamental performance, relative to reason 2, expectations, is one of the most important drivers in stock moves over the long-term, because this is the primary driver for long-term investors to invest or not and typically long-term investors drive long-term trends. So then you might ask, how do you find out what are expectations? Well, sadly… it’s not always easy, and there is no precise answer because you can never know every single investor’s expectations at any single moment. The best we have access to most of the time is big investment banks, and the individual companies themselves, often try to collate expectations from big investors and share around the average consensus number. Investment banks also publish their own expectations on platforms like Reuters/Factset/Bloomberg and share them with big market news networks like CNBC/Reuters/Bloomberg so a rough consensus on expectations can be estimated and used. So you need to look out for this information every quarter.
Moving on, reason 3 – economic conditions, this is another HUGE factor. The biggest of these is often changes in interest rates, for example, at present 85% of forecasters are predicting a 25bp cut in the Fed rate at the Sep 17th meeting next month. This is providing support to bullish investors, as lowering rates typically improves economic conditions and thus stock prices. Further, an even bigger change to interest rates to watch for is a change is overall direction of interest rates (meaning, from a trend of cutting to hiking or obviously hiking to cutting), as this will substantially influence future economic conditions. Hence why the words and tone used during central bank meetings are so heavily scrutinized and debated. Other big pieces of data are inflation, unemployment and GDP to name just a few which all provide insight into economic conditions, which in turn help investors forecast a company’s abilities to generate profits. So be aware of high profile economic data releases and when the US central bank and other relative central banks are making their key interest rate decisions throughout the year.
So, moving on, let’s discuss the main short-term reasons which impact stock moves…
Reason 1 – market sentiment, what does this mean? Are the majority of investors bullish or bearish? Where is the market currently trading? At all-time highs (probably an indication investors are bullish) like right now or 20%+ down like back in April (probably a good indication investors have turned bearish). What is the market valuation (price to earnings multiple)? Expensive relative to history or cheap? Market sentiment is a huge driver for short-term moves. If the market is at all-time highs and negative news comes along – like happened in April the market can fall very quickly and vice versa, if it’s had a big sell off and good news comes it can rally very quickly, as happened when Trump delayed his tariffs. This also means when market sentiment is very bearish and negative news comes and the market does not go lower, well now you have a strong signal of support. Just as when at highs and positive news comes and the market no longer continues to rally. Therefore, having an idea of market sentiment is very important as it can drive individual stock moves. This can mean that when an individual stock has good news, or bad news, if market sentiment on that stock, or sector, or the whole market, is counter to the news that should have impacted the stock you are focused on then sadly, the good news or bad news can simply fall on deaf ears, as sentiment can override specific news.
Reason 2 – external shocks, so things like natural disasters, wars, pandemics, or sudden shifts in policy can all create volatility in individual stocks/sectors and the overall market. With a great example of this back in April this year, when Trump substantially changed economic conditions globally with his far bigger than expected tariff proposal and it sent stocks into a nose dive, and then the reverse happened when he delayed them. Another great external shock example was COVID-19 back in March 2020. Sadly these events are much harder to prepare for and generally you must just accept they are part of the investing cycle.
Reason 3 – unknowable reasons, finally, the most annoying category, sadly there are also the countless other sometimes insignificant and, worse, totally unrelated reasons, which can affect any single stock or even an entire sector. For example, a big pension fund manager needs to raise capital to buy something else and thus sells down some existing positions in a particular sector or stock. Therefore, all we see as investors is there is noticeable downward pressure on a stock without any relevant negative news. This can persist for many days or weeks yet there is just no good reason. This does not mean that stock has bad news but relatively that particular fund manager found something else to invest in and there are thousands of fund managers all moving billions of dollars around. This also happens to a more extreme extent when an entire fund fails or, to a lesser extent, is simply closed – again due to many different reasons. Sadly, as I say, this final category of reasons is long and by far the most annoying, as often you never find out the answer explaining a move.
So in summary! There are many reasons that drive stock prices. Typically… the short-term moves are driven mostly by news, rumours, and market sentiment — sadly all often unpredictable and hard to prepare for. Whereas, the long-term is typically driven by company fundamentals (earnings, innovation, competitive advantage, management quality) and of course overall economic conditions so you must be aware of earnings release dates for any stocks you invest in and get prepared to update your view based on the data the company provides and also be aware of the release schedule of major economic data and interest rate decisions.
Thanks for reading to the end! If you like this kind of information… then please consider bookmarking my website and subscribing to my YouTube channel as new posts and videos to come each week!
Leave a Reply