What Does and Doesn't Matter To The Market
Here is what does and doesn't matter to the market and stock prices:
1. Earnings MATTER. At the end of the day, stock prices follow earnings. Thus, if you think corporate earnings are headed higher, so too, will stock prices.
2. Employment DOESN'T MATTER. Employment is a lagging indicator. If you wait until companies are hiring to get bullish on the market, you will be way, way late for any rally.
3. Interest rates MATTER. Interest rates matter because they help determine the relative attractiveness of stocks versus other assets. For example, if interest rates are high, investors may be more likely to own bonds than stocks. Likewise, when interest rates are low, investors will be much more interested in stocks. We see the proof of this fact at the present time!
4. Inflation MATTERS. Inflation affects stock valuations dramatically. In low-inflation environments, investors are willing to pay more for growth since it will be worth more tomorrow. Why that is important is because low inflation translates into higher price/earnings ratios. And higher price/earnings ratios translate into higher stock prices.
5. Corporate and mutual fund scandals DON'T MATTER. Yes, they make for newspaper headlines, but over time, the impact of such scandals is rather limited. True, investors use these things as excuses for market declines. However, if you analyze what happened during the bear market of 2000 to 2002, the drop in stock prices wasn't the result of corporate scandals. Instead, it was the result of plummeting corporate profits at a time when stock valuations were extremely high. High stock valuations and falling corporate profits is not a good combination for investors, and that was clearly seen in the sharp declines in most market indexes at the time.
Bottom line: The three main engines of stock prices are corporate profits, interest rates, and inflation. Everything else is secondary.
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1. Earnings MATTER. At the end of the day, stock prices follow earnings. Thus, if you think corporate earnings are headed higher, so too, will stock prices.
2. Employment DOESN'T MATTER. Employment is a lagging indicator. If you wait until companies are hiring to get bullish on the market, you will be way, way late for any rally.
3. Interest rates MATTER. Interest rates matter because they help determine the relative attractiveness of stocks versus other assets. For example, if interest rates are high, investors may be more likely to own bonds than stocks. Likewise, when interest rates are low, investors will be much more interested in stocks. We see the proof of this fact at the present time!
4. Inflation MATTERS. Inflation affects stock valuations dramatically. In low-inflation environments, investors are willing to pay more for growth since it will be worth more tomorrow. Why that is important is because low inflation translates into higher price/earnings ratios. And higher price/earnings ratios translate into higher stock prices.
5. Corporate and mutual fund scandals DON'T MATTER. Yes, they make for newspaper headlines, but over time, the impact of such scandals is rather limited. True, investors use these things as excuses for market declines. However, if you analyze what happened during the bear market of 2000 to 2002, the drop in stock prices wasn't the result of corporate scandals. Instead, it was the result of plummeting corporate profits at a time when stock valuations were extremely high. High stock valuations and falling corporate profits is not a good combination for investors, and that was clearly seen in the sharp declines in most market indexes at the time.
Bottom line: The three main engines of stock prices are corporate profits, interest rates, and inflation. Everything else is secondary.
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posted by Bob Moser at
8:06 PM
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