What Moves the Stock Market?
The stock market is a measure of business activity, generally considered an indication of the direction of the U.S. gross domestic product. One of the most watched stock market indexes, the Standard & Poor's 500, is a component of the Composite Index of Leading Indicators published by the Conference Board. A rally in the stock market adds wealth to both personal and institutional investment accounts and a drop in the market removes wealth from the system.
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The Economy
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The stock market reacts to economic news. If unemployment unexpectedly rises or housing starts fall, the stock market sees the potential for an economic slowdown, which causes company revenues and profitability to decline. The market does not like a slow economy, so it moves into bearish mode -- prices of stocks drop and this is reflected in the indexes such as the Dow Jones Industrial Average and the Nasdaq Composite. When economic indicators unexpectedly rise, the market rises, too.
Interest Rates
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Federal Reserve monetary policy also moves the stock market. The Fed sets interest rates to manage the economy out of recessions and to forestall inflationary trends. Low interest rates are generally bullish for the stock market because money is inexpensive for companies to borrow and plentiful for consumers to spend. This translates into more revenues and profitability for publicly trading corporations, and their stock prices rise. Inflation fears also spur the stock market higher because stocks are assets and, during inflation, asset prices rise. However, the Fed raises interest rates when it sees inflation building, and higher interest rates tend to dampen stock market enthusiasm.
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Company News
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Major companies that are considered indicative of the general economic health of the country, such as the auto, industrial, technological and consumer goods producers. When these show strong revenues and stock analysts raise their earnings estimates and issue buy recommendations, the news tends to lift the entire stock market. The stock market likes a strong economy. Analyst stock downgrades and downside earnings surprises tend to bring on bearish reactions in the marketplace because they indicate a possible slowing of the economy.
Rumors, Reality and Events
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The stock market hates uncertainty and is often moved by fear of bad news coming from major companies. Rumors of pending bank failures or labor problems at auto manufacturers can have negative effects on the entire marketplace. Natural disasters that disrupt business in a large sector of the nation or in important trading partner countries can depress the market. Terrorist attacks also can drop the market. Even national elections can move markets depending on whether the Republican or Democratic party wins the most seats in Congress.
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References
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