Forces that Move Stock Prices

Among, the largest forces that affect stock prices are inflation interest rates, bonds, commodities and currencies. At times the stock industry suddenly reverses itself followed typically by published explanations phrased to suggest that the writer’s keen observation allowed him to predict the field turn. Such circumstances leave investors somewhat awed and amazed at the infinite amount of continuing factual input and infallible interpretation needed to avoid going against the industry. While there are continuing sources of input that one needs in order to invest successfully in the stock field, they are finite. If you get in touch me at my web site, I’ll be glad to send some with you. Interestingly, What is more important though is to have a robust model for interpreting any novel information that comes along. The model should take into profile human nature, as well as, major industry forces. The a is following personal working cyclical model that is neither perfect nor comprehensive. It is simply abelens through which sector rotation, industry behavior and changing niche sentiment can viewed.

As alwayswithany as it turns out understanding of markets begins , the familiar human traits of greed and fear along with perceptions of supply, demand, uncertainty and value. The emphasis is on perceptions where group and individualusuallyperceptions differ. Investors can be depended upon to seek the largest return for the least amount of danger. In fact, Markets, representing group behavior, can be depended upon to over react to almost any recent information. The subsequent price rebound or relaxation makes it appear that initial responses are much to do about nothing. But no, group from another perspective perceptions simply oscillate between extremes and prices follow. It is clear that the general market, as reflected in the major averages, impacts more than half of a stock’s price, while earnings login for most of the rest.

With this in mind, stock prices should rise with falling interest rates because it becomes cheaper for companies to finance projects and operations that are funded through borrowing. Lower borrowing costs allow higher earnings . increase the perceived value of a stockwhich It’s worth more than ever noting that In a low interest rate environment, companies can borrow by issuing corporateratebonds, offering rates slightly above the average Treasury without incurring excessive borrowing costs. Existing bond holders hang on to their bonds in a falling interest rate environment because the rate of return they are receiving exceeds anything being offered in newly issued bonds. Stocks, commodities and existing bond prices tend to rise in a falling interest rate environment. As you may know, Borrowing rates as it turns out , including mortgages, are closely tied to the 10 year Treasury interest rate. When rates are low, borrowing increases, effectively putting more cash into in modern times circulation with more dollars chasing after a relatively fixed quantity of stocks, bonds and commodities.

Bond traders continually compare interest in modern times rate yields for bonds with those for stocks. more than ever Stock yield is computed from the reciprocal P/E ratio of a stock. Earnings divided by price gives earning yield. The assumption here is that the price of a stock will move to reflect its earnings. If stock yields for the S&P 500 as a whole are the same as bond yields, investors prefer the safety of bonds. Bond prices then and stock prices decline as a effect of currencyrisemovement. As bond prices trade higher, due to their popularity, the effective yield for a given bond will decrease because its face value at maturity is fixed. As effective bond yields further, bond prices top from another perspective out and stocks begin todeclinelook more attractive, although at a higher danger. Actually, There is a natural oscillatory inverse relationship stock prices andbetweenbond prices. In a rising stock niche, equilibrium hascorporatebeen reached when stock yields appear higher than bond yields which are higher than Treasury bond yields which are higher than savings user ID rates. Longer condition interest rates are naturally higher than short term rates.

The Federal Reserve, seeing higher inflationratesraises interest , to remove excess in modern times cash from circulation to hopefully reduce prices once again. Commodity price changes permeate throughout the economy to affect all hard goods. In fact, Having an increased supply of cash in circulation in the economy, due to increased borrowing under low interest rate incentives, causes commodity prices to rise. Stock investors, perceiving the effects of higher interest rates on enterprise profits, beginpricesto lower their expectations of earnings and stock fall. Borrowing costs rise, making it more hard for companies to raise capital. Actually, That is, until the introduction of higher prices and inflation.

Long clause bond holders keep an eye on inflation because the real rate of return on a bond is equal to the bond yield minus the expected rate of inflation. Therefore, rising inflation makes previously bondsissuedless attractive. In fact, The Treasury Department has to then increase the coupon or interest rate on newly issued bonds in order to make them attractive to novel bond investors. As you may know, With higher rates on newly issued bonds, the price of existing fixed coupon bonds falls, causing their effective interest rates to increase, as well. Indeed, So both stock and bond prices fall in an inflationary environment, mostly because of the anticipated rise in interest rates. As you may know, Domestic stock investors and existing bond holders find rising interest rates bearish. Indeed Fixed return investments are most attractive when interest rates are, falling.

In addition to having too many dollars in circulation, inflation can also be increased by a drop in the value of the dollar in foreign exchange markets. The cause of the dollar’s recent drop is perceptions of its decreased value due to continuing national deficits and trade imbalances. Indeed, Foreign , goodsas a consequence, can become more pricey. This would make US products more attractive abroad and improve the US trade balance. Interestingly, However, if before that happens, foreign investors are as finding US dollar investments less attractive, putting less funds into the US stock industry, a liquidity problem can outcome in falling stockperceivedprices. Political turmoil and uncertainty value also cause the can of currencies as it turns out to decrease and the value of hard commodities to increase. Commodity stocks do quite well as it turns out in this environment.

The Federal Reserve is seen as a gate keeper who walks a fine line. It may raise interest rates not only to prevent inflation, but also to, make US investments remain attractive to foreign investors. This particularly applies to foreign central banks who obtain huge quantities of Treasuries. Concern about rising rates makes both stock and bond holders uneasy for the above stated reasons and stock holders for yet another reason. If rising interest rates take too many dollars out of circulation, it can cause deflation. Interestingly, Companies are then unable to trade products at any price and prices fall dramatically. The resulting effect on stocks is negative in a deflationary environment due to a basic lack of liquidity.

In summary, in order for stock prices to move smoothly, perceptions of inflation and deflation must be in balance. A disturbance in that balance is usually seen as a transform in interest rates and the foreign exchange rate. Stock bond prices normally oscillate in opposite directions due to differences in threat and the changing balance between bond yields and apparentandstock yields. When we locate them moving in thethesame direction, it means a major transform is taking place in economy. A falling US dollar raises fears ofpriceshigher interest rates which impacts stock and bond negatively. The relative sizes of field capitalization and daily trading support explain why bonds and currencies have such as it turns out a large impact on stock prices. First, let’s consider total capitalization. Threetheyears ago bond industry was from 1.5 to 2 times larger than the stock industry. With regard : trading volume, the daily trading ratio of currencies, Treasuries and stocks was then 30to7:1, respectively.