What Causes the Stock Market to Rise and Fall?

Daniel Penzing
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International events, interest rates, and public sentiment are just some of the factors that can cause the market to change.

Each of these will be further explained.

Although the result of each of these factors is a change in a stock’s share price, they affect the market in different ways.

International Events

Any event that takes place on a global scale can potentially have an effect on national and global economies. This can be a factor when it comes to trade and commerce, which could have a knock-on effect on the stock market.

Interest Rates

A rise or fall in interest rates can have a knock-on effect on bond markets, which can have a knock-on effect on stock markets.

Public Sentiment

The mood of the masses has a significant impact on the stock market. If someone is feeling optimistic and confident, then public sentiment is high. In contrast, if someone is feeling pessimistic and fearful, then public sentiment is low.

You might be wondering how that can have an effect on the stock market. The answer is “ market sentiment.”

Market Sentiment

Market sentiment is a direct result of public sentiment and is determined by the public’s perception of the market.

Interest Rates

Interest rates are the biggest factor influencing stock market expectations. Historically, the U.S. stock markets have been very good at predicting the direction of interest rates.

Interest rates directly and indirectly affect inflation, and higher inflation and an accompanying rise in interest rates mean poorer profits and a lower stock market for the next year or two.

Investment Opportunities

A glance through the history books shows that a recession usually follows after a bull market with a subsequent crash. This is because the opportunities for investing in stocks are more limited and many investors are more likely to diversify their holdings into more secure investments, like bonds. However, many analysts see these recent economic events as a correction of overambitious investors and a return to our prerecession levels.

Corporate Profits

The stock market is constantly in motion, moving up and down with investors' expectations. On any given day, the stock market reaches a new high or a new low, as investors shift their expectations about the future. For example, if a new drug outperforms expectations of investors, the stock price of the drug company will increase. This increase will cause the stock market to increase as a whole. Naturally, individual stocks will tend to fluctuate based on the market. In other words, a stock that increases significantly when the market increases might decrease as the stock market falls. At its most basic level, this is what puts the "stock" in "stock market." A stock is a share in a company, which is why the term "stock market" is often used to refer to the entire economy.

The State of the Economy

If you are looking to invest in the stock market, understanding how the economy impacts the market is a MUST. The stock market and the economy are linked in several ways. If you haven’t already, take some time to learn more about how the economy impacts the stock market.

First, the economy is commonly defined as the activities that make up our country and the factors that drive it. In the United States, these factors include manufacturing, agriculture, construction, retail sales, consumer credit, personal income, and business profits. These indicators feed into the Federal Reserve, who has released their own economic forecast as well as economic predictions from other top industry experts. You should consider the forecast when making investment decisions.

Second, the stock market and the economy operate on separate tracks for most of the time. When economies are strong, the stock market tends to be strong as well. Sometimes bad news can send the stock market on a downturn. For instance, for a variety of reasons, the stock market declined significantly on September 11, 2001, after planes crashed into the World Trade Centers.

International Events

When you watch the news and hear about the stock market rising or falling, chances are, an international event will be the culprit. Whether it’s a war between two nations, a shift in political leadership, or the outbreak of an epidemic, these events can affect global demand for goods and services.

For example, if there’s a war between Japan and China, the United States could be caught in the middle of the fray. If the U.S. and China trade allies, it’s likely that China’s goods will become more popular here and that China will need to sell more goods in the United States to keep demand high. The stock market will rise as a result.

On the other hand, if the U.S. and China trade enemies, China will probably place laws and sanctions on American goods. This will decrease demand for American products, but will decrease demand for Chinese goods at the same time. This will cause the stock market to fall.

The reason that international events are considered the biggest stock market influencer is that they’re the most unpredictable. If you can predict an event, chances are you can devise a strategy for how the market will react. But if an event is unpredictable, you won’t be able to accurately predict how the market will react.

International Capital Flows

When markets rise or fall too far too quickly, international flow of capital can return them to normal. Every country has its own currency that people can use to buy assets in that country. Exporters earn U.S. dollars, pounds, euros, or Chinese yuan, while importers pay for their goods in the same currencies.

When a country has enough exports to pay for its imports, it will build up a surplus and that surplus must be invested somewhere. Practically anywhere can receive these currencies.

The surplus can be invested in the country which exported it but a more likely option is that it will go elsewhere because goods flow across borders freely.

Generally, a country will not want to invest its surplus in its rivals because there is still a risk of being attacked by them for political or military reasons.

As a result, countries have set up special banks to help “recycling” money across the world. There may be a bank in one country that is holding extra money from a current account surplus. It will put this money in the bank account of a bankrupt country and take a bond in return. This allows the bankrupt country to pay its debts and restart its economy.

It is exactly the same when the money is used to buy stocks or bonds, the only difference is that the recipient of the money may be very happy to wait several more years to receive their money with interest.

Public Sentiment

The Mood of the Market

Major events in the world, positive or negative, affect the market in one day or the other. The recent development in US is the decision by Donald Trump to impose tariffs on China and other countries. Such decisions affect the manufacturing industry and also the prices of goods.

Changes in economic data: When economic factors change, it affects the market. Any bad news like drop in consumer confidence, rise in inflation, lower than expected GDP, bad quarterly results etc, would cause the market to take a hit. As an investor, it is important to monitor economic data or better still, invest in a mutual fund that invests in stocks that do well in an environment of bad economic news.

Earnings Reports and Stock Price: Stocks usually deliver irregular returns within a quarter because of the quarterly results. A good earnings report can propel stocks upward while a bad earnings report can cause a stock to drop. It is, therefore, important to read the quarterly results.

Supply and Demand

In a nutshell, the stock market is an exchange system that allows investors to buy and trade company stock, including individual shares. And company stock is just a slice of the company, so when a company does well, the price of its stock tends to go up.

The stock market charts the value of the stock over time, giving investors a quick way to examine a company’s financial health, and it’s this system that causes the stock market to rise or fall. Essentially, the stock market goes up when there are more buyers than sellers and sellers than buyers.

Here’s how it all works.

You won’t find real stock in the market. It’s a virtual place, where people buy and sell pieces of companies as if they were trading baseball cards. In order for a trade to happen, one person must agree to sell a piece of stock to another person, who then becomes the new owner. This works because both parties trust that the company in question will continue to do well, and that the stock will be valuable in the future.

If someone buys stock in a company, that essentially means they’re buying a piece of the company. They’re investing in the business, and their money goes toward the company’s future success.

Growth/Decline in Major Industry Sectors

Corporate America is always looking for the next big thing. When one industry or product line begins to decline, companies look for ways to move on. Conversely, when an industry begins to boom, companies rush to invest in that industry to see if they can be a part of it. Since corporate America drives almost all of the growth in the stock market, investors should look to major industries as a way to find good stocks to invest in.

Another major factor that affects stock values is investor perception. This perception is largely shaped by economic trends and affects nearby businesses. A good example of this is the energy industry. If oil prices are increasing and the economy is doing well, investors will believe that energy companies will make a lot of money. Therefore, share prices for energy companies will increase and the stock market will go up. On the other hand, if the economy is doing poorly and gas is extremely expensive, then stock prices will go down, so people won’t buy as many cars, or they will make them more efficient. This will have a negative effect on the automobile industry, which will then hurt the gas and refinance companies that lend money to car manufacturers.