Stock markets play an important role in the financial plans of millions of Americans and other investors worldwide who are increasingly taking control of their investment decisions. Markets react to the actions of individual investors, institutional money managers and financial institutions. Investors need to understand the influences on the markets so that they can anticipate the impact on their investment portfolios and implement appropriate trading strategies.
Quarterly earnings reports influence stock markets. The peak earnings periods are four- to six-week stretches from the middle of January, April, July and October. Downside and upside surprises affect not only individual stocks but also industry sectors. For example, if a major technology company announces lower-than-expected profits and warns about future earnings, technology stock prices across the board are likely to suffer because of perceived sector weakness. Conversely, a surprisingly strong earnings report from a major company could rally share prices because of optimism of an impending economic turnaround. Stock analysts, especially those widely quoted in the business media, could cause temporary market reactions by issuing negative or positive opinions on individual stocks or on industry sectors.
The key economic data include non-farm employment, gross domestic product and consumer and producer price inflation. Employment and GDP data influence the markets because they provide direction on how corporate profits are going to be affected by the current and anticipated strength in the U.S. economy. Inflation data provide hints on the future direction of interest rates because the Federal Reserve Board might tighten rates to curb rapidly rising prices. Higher rates would increase corporate expenses, which would adversely affect profits and stock prices.
In addition to earnings reports and economic data, general news reports also influence stock markets. The interconnected nature of global markets means that a sharp move in the Japanese markets overnight will ripple through European markets in the early morning hours and reach the U.S. markets by 9:30 a.m. Eastern time. A flood in the Far East would raise concerns over supply lines, while a sovereign debt crisis in even a small European country could create fears of a cascading series of bank failures. Major geopolitical events, such as terrorist incidents or civil strife, could also affect markets worldwide.
The time of the year could influence the markets. Many market players take vacations during the months of August and December. This usually leads to low trading volumes, which could exacerbate market reactions to news events. Quarter-end window dressing could also influence markets. Some portfolio managers attempt to improve the appearance of their portfolios by selling "losers" and buying "winners" at the quarter's end, which could increase market volumes and volatility.
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