Wall Street reacts to everything. It has its own moods. It has its own psychology.
The stock market can be seen as an auction, where many companies are up for sale for the highest bidders. It all comes down to supply and demand. When there is no demand for shares, the shares are worth less. When there is high demand for shares, the share price will be high. Factors that affect supply and demand include company news and performance including earnings, mergers, new products, dividends, and the economy as a whole.
Supply and demand is reflected through investor sentiment. Investor sentiment is seen in two ways, the bull market and the bear market. The bull market is a strong stock market where stock prices are rising and investor confidence is growing. It is often tied to economic recovery or an economic boom, as well as investor optimism. A bear market is a weak market where stock prices are falling and investor confidence is fading. It often happens when an economy is in recession and unemployment is high, with rising prices.
Let’s look at some examples of how investor sentiment can be affected.
Economic and Political factors have a huge impact on the market. A rise in energy costs can lead to lower sales and therefore lower demand. This means lower stock prices. Think about it, if there is no interest to buy, the shares will be cheaper, almost like a discount. Acts of terrorism also have negative impacts on the economy.
They create uncertainty, reduce investor confidence and increase risk perception. This leads to lower investments and slowed economic growth.
Interest Rates: Banks raise and lower interest rates to stabilize the economy, as this is what monetary policy is all about. If a company borrows money to improve its business, higher interest rates will affect the cost of debt. Higher interest rates reduce profits and dividends, which then lower stock prices. Inflation occurs when there are higher consumer prices and lower profits which eventually leads to lower stock prices. Higher interest rates tend to slow down inflation. Deflation occurs when there are falling consumer prices with higher profits, which eventually leads to higher stock prices as lower interest rates usually lead to people spending more money.
The Value of the dollar: We often hear about currency rates and the value of the dollar, but how exactly is it related to the stock market? The value of a dollar is affected by interest rates, the country’s debt and the overall strength of it’s economy. If the dollar rises, consumers have to spend more to buy goods. This means lower sales and lower stock prices. If the dollar falls, it makes it cheaper for consumers to buy the products. This means higher sales and higher stock prices.
Industry Performance: Many companies are categorized based on their industry. Stock prices of companies in the same industry usually move together when there is a catalyst that affects a specific industry. For example, if the weather is very bad, farming, aviation and supermarkets can be heavily affected as productivity may decline. Sometimes the stock price of a company will benefit from bad news for its competitor if the companies are competing for the same market. For example, news or information was released that a company was unethical with how it manufactures its products. Consumers may move away and turn to its competitor, now giving the competitor an advantage.
Now that we have seen that the market can be extremely emotional, it is important for traders to be able to control their own emotions. It is important to avoid irrational trades and maintain that “poker face.” It’s important to keep a balance between your fear and your hope as a trader. You may feel upset when a stock price drops lower than your buying price and may find yourself waiting to sell when you break even. You finally decide to sell. A few moments later, the stock price reverses to the upside and you end up kicking yourself. This happens because other traders are also feeling the same fear as you and they sell at the same time. It is important for you to follow your trade plan and stick with it! Trade plans will help you build your confidence, minimize your losses and maximize your profits.