Many investors often question what influences the markets and what influences are most critical to pay attention to. There is no easy answer because there are several factors that can manipulate the markets and no one particular factor controls the direction. It’s a combination of several influences such as corporate performance, government- monetary policy, geopolitics, and investor psychology. Also, today’s media attention is much broader, and with the internet individuals and institutions have access to more information at greater speeds. The fundamentals are still the same as they were years ago, but the access to information has significantly changed.
Corporate performance is a vital influence on the stock market and can be one of the major factors of market shifts. The primary driving force of a company stock is based on the company’s performance or other wise known as its corporate earnings. So it’s important for investors to understand that corporate performance, whether it is negative or positive, can impact the markets. Especially if a negative or positive trend occurred through out the same sector. A recent example of this was just a few years ago during the housing bubble, we experienced significant growth in real estate companies, a few years later we experienced the very opposite as the real estate sector plummeted.
Another direct influence is by government, monetary policy can tighten, loosen or change interest rates to slow growth or increase growth of our economy. For example, by tightening policy and raising interest rates we can reduce the amount of money in our financial system (restricting growth). Whereas, by loosening policy and reducing rates, we maybe able to spark growth in our markets and increase borrowing.
Our government has the control of changing our markets through policy and interest rates but we also can experience market shifts through geopolitical changes as well. New government regulations, trade policy, and global relations can open or close the doors to growth in our markets. This has become a key factor in the last few decades as we’ve become more of a global economy and countries now rely on each other more.
Most of these factors can be controlled in some way but our investor sentiment about the markets changes as a result of these influences. Investor sentiment is a critical piece in sustaining a healthy economy so keeping close tabs on investor psychology is important. Typically, we are either quite optimistic or very pessimistic about the markets. As a result, investors will either sell or buy depending on how investor’s feel. This usually can be seen during times of a bear market or a bull market.
These are just some of the primary reasons why our markets may shift and will continue to in our future. I find it best to understand a client’s particular situation and clearly identify specific goals to help weed out the factors that can influence decisions.
Michael Cochell is associate vice president of Jacob Gold & Associates. This information was prepared by Michael Cochell of Jacob Gold & Associates Inc. and is for educational information only. The opinions/views expressed within are that of Michael Cochell of Jacob Gold & Associates Inc. and do not necessarily reflect those of ING Financial Partners or its representatives. In addition, they are not intended to provide specific advice or recommendations for any individual. Neither ING Financial Partners nor its representatives provide tax or legal advice. You should consult with your financial professional, attorney, accountant or tax advisor regarding your individual situation prior to making any investment decision.