Naturally investors would only like to see their portfolios continue to go up, but that is not reality, stock markets will always rise and fall; two steps forward, one step back.
Why? The stock market is comprised of publicly traded companies. A company’s stock price is a reflection of the future value it’s expected to bring shareholders; this could be achieved through profitability or earnings potential. Stock markets are rarely flat; this is because everyone will have their own opinion on the underlying companies that trade on the market.
Supply & Demand
The change in the supply and demand of a particular stock will cause markets to fluctuate, the more people wanting to buy a stock will cause its price to rise, conversely the more people who want to sell a stock will cause the price to fall. Media reports and current events (like the uncertainty over trade agreements) can make investors nervous causing them to sell a stock for less than its inherent value. This is because they are reacting to what is being reported in the news instead of looking at the fundamentals of the company. News that will affect a company’s stock price (good or bad) can include:
- Security breaches or questions surrounding a company’s data integrity
- A change in management
- A merger or take over in the industry
- The launch of a new product or service, or the recall of a product
- Securing or not securing a large contract or deal
Geopolitical Events
Stock markets will rise and fall with Geopolitical events that are perceived as positive or negative. These events can include the news of higher or lower tax rates, acts of terrorism or the signing of international trade agreements. Events perceived as negative can cause investors a lot of anxiety, this may lead them to feeling nervous and make them wonder if it is a good time to sell their stocks locking in any profits they have already achieved. Alternatively, news of a corporate tax cut can be positive for businesses as they may expand or increase sales due to the lower costs. Such news often inspires investors to purchase a company’s stock, causing it to rise.
Commodities
Fluctuating prices for commodities such as oil and gas, timber, gold, silver or lead can affect the earnings potential of companies that use, sell or process those commodities. For example, recent reports indicate gas prices are on the rise, this may affect the stock market because this increase will affect oil and energy companies.
Interest Rates
Central banks will increase or decrease interest rates to stimulate, stabilize or cool down the economy. Higher interest rates make it more expensive for companies (and individuals) to carry debt. This can lead to a reduction in spending and overall future earnings potential. Limiting a company’s growth through higher interest rates may cause the stock price to fall. Conversely, lower interest rates will cause stock markets to rise based on the anticipation businesses will increase their spending.
Volatility can be Good for Investors
Markets are made up of various traders whom have different beliefs, assumptions and estimates on the companies that make up the stock market. Volatility in the market simply reflects the changes in investor’s assumptions and estimates. If everyone thought the same way the market would cease to function, there has to be different opinions for trade to happen.
Professional money managers spend their days analysing the fundamentals of companies and look for opportunities to purchase stocks when they fall out of favor – for whatever reason. There is a saying in our industry; be brave when others are fearful, and fearful when others are brave.
I am always here to answer your questions and provide guidance, if you would like to discuss the impact of the recent market volatility on your portfolio, give me a call.
Have a great weekend,
Tracey
Sources: Original article posted on Advisor.ca 05-07-18 by Sharon Ho.
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