Even though the stock market attracts a wide range of investors who think it will grow their money, there’s no reliable method to predict stock prices most of the time accurately. Sure, traders can follow technical charts and financial fundamentals to get an idea where stocks may go, but it’s all still speculation.
The market is affected by multiple factors that constantly change due to economic conditions. Here are some essential principles to learn to increase your knowledge about stock market trends.
One of the primary drivers of the stock market is whenever the Federal Reserve announces changes in the interest rates. Since the financial crash of 2008, the Fed has lowered the federal funds rate to stimulate borrowing at the banking level. This activity led to corporations borrowing from banks and investing in their own stocks, which helped the markets recover. In times of inflation, the Fed may raise this rate to reduce borrowing among banks from the Federal Reserve.
Public companies regularly report quarterly and annual earnings to the media and investors. These earnings can move a stock price up or down, depending on how the data compares with Wall Street analyst estimates. If the report beats the analysts’ predictions regarding earnings per share, the result can be a surging stock price on the day of the report. In some cases, the price continues forward momentum for weeks.
National and Global Economic News
Another catalyst for stock price action is economic news. When the economy is booming, unemployment is low, and consumer confidence is high, it can lead to bull market rallies. Conversely, when overall economic news paints an uncertain future, stocks can sell off quickly. Stocks can also tumble when market fraud is suspected, as was the case of Enron and during the 2008 financial crash.
Energy prices play a big role in the overall state of the economy since all businesses have electricity costs. Energy prices generally remain stable most of the time, except when wars break out or when production shortages occur, which can strangle businesses with extra expenses. When gas prices get too high, it causes the public and enterprises to search for alternate forms of transportation. Ideal stocks are those of companies with high-profit margins.
Several factors affect stock market trends. These factors are usually easy to research in current financial news. Financials and economic headlines are the leading drivers that move the market toward bulls or bears.