While the performance of an individual company varies in the stock market due to news about its performance, such as earnings reports and acquisition announcements, there are outside influences that will affect stocks and the market as a whole. These factors include, but aren't limited to: economics, politics, natural disasters, man-made disasters and market psychology.
Macro-economic factors such as interest rates, inflation, unemployment and economic growth often move stock markets. Stock markets are always rooting for more economic growth, because it usually means more profits for companies, and more profits tend to grow the value of stocks. Declining interest rates often send markets higher, because they are seen as a harbinger of economic growth. High inflation has the opposite effect, because it signals that interest rates will be rising in the immediate or near future, thus slowing economic growth. Rising unemployment foreshadows lower economic growth, and falling unemployment tells stock investors that growth is on the way. When these data are reported, they can move stocks, but they may not if the numbers are more or less what investors expected. Nevertheless, if you're investing in stocks, it's important to keep an eye on these numbers. They can often predict whether the market as a whole will go up or down.
A belief by investors that control of the government by one party or the other will hurt or benefit them can move the market as whole. This is especially true in times of intense domestic turmoil. Significant developments abroad also can affect U.S. markets. An election involving one of our major trading partners that brings to power an avowedly hostile government can push markets lower. However, the converse is also true. The election of a friendly foreign government can move markets higher. These are scenarios we might see in trading partners with democracies. In non-democratic countries with which we trade, coups, general strikes and revolutions may be more likely. The positive or negative effect on the stock market would depend on the country and the circumstances, but uncertainty generally moves markets lower.
Natural and Man-Made Disasters
Natural or man-mad disasters with economic consequences also affect stock markets. If an earthquake happens in a bustling city where there's lots of economic activity, markets will move down as investors fear a negative impact on economic growth. Similarly, if there's a disaster at a man-made facility of economic importance, such as an oil refinery blowing up, it can put downward pressure on stock prices.
At the end of the day, swings in the stock market are caused by human beings. There are boom periods in a rising market when everyone wants to buy. Alternatively, there are also periods of panic when almost every investor is scrambling to sell.
- The Library of Economics and Liberty: Stock Market
- AAII Journal: Don't Fight the Fed: Interest Rates and their Impact on the Stock Market
- Economy Watch: Stock Market Performance
- Business Insider: Why A Mitt Romney Stock Market Rally Is Never Going To Happen Read more: http://www.businessinsider.com/a-mitt-romney-stock-market-rally-2012-8#ixzz23SFYK9pI
Wayne Marks has more than 20 years of experience in finance, education, public relations and marketing in both New York City and Washington, D.C. He has worked for corporate and nonprofit organizations and holds a certificate from the Wharton School of Business.