[Note: Today's Drip Port column is written by a Foolish guest from the Drip discussion boards. Please welcome Paul Litvak for his third appearance in Drip Port!]
Let's look at some of the items that move the financial markets and may affect our investments.
Certainly the greed of investors is at times a large factor in the stock market. As stocks rise, investors sometimes jump in without doing their due diligence because they want to participate NOW. Greed overtakes their cautiousness. In other words, their desire to make a "quick killing" destroys their sense of responsibility, and investing becomes merely a gamble. You can often witness this when watching a live financial program on TV. You may see a money manager mention that he likes a particular stock, and then a chart shown a few minutes later shows an upward move in that stock due to viewers purchasing without doing their due diligence.
Fear also moves the stock market, but in a different direction. Sometimes, investors become so afraid of losing more money that they will sell holdings at almost any price in order to get out... NOW. This can be the ideal time to buy -- when everyone is scared and running for cover. In these situations, you may get a chance to buy an investment "on sale." When a grocery store has a huge sale everyone barges in to buy; when a sale is happening on the stock market, no one is interested. Selling drives our stocks down, but people doing their homework and choosing Foolishly are often able to pick up some bargains.
In the short and long term, earnings can move the stock market. Good earnings usually push a stock up; bad earnings typically pull it down. This proves true especially over the long term.
What else moves the stock market? Interest rates. When interest rates rise, companies that need to borrow money must pay higher interest rates, which makes borrowing notably more expensive, particularly with small companies. As interest rates fall, companies are able to borrow money at a lower interest cost and therefore are able to expand their businesses at lower borrowing costs overall. In fact, some large companies will use a low interest rate environment to sell long-term bonds cheaply. High interest rates also affect many industries such as housing and automobiles because consumers must decide whether to spend money on high interest payments to buy these big-ticket items. Generally, low interest rates help our portfolio, while high interest rates hurt it.
Another stock market mover is simply this: how the financial community views a stock or the market. Even if a company has good earnings but a lower-than-expected near-term performance ahead of it, the stock can head south regardless of strong current results. An example is IBM (NYSE: IBM). (Note: This writer holds IBM.) The company had good earnings in the fall quarter of 1999, but management said that there would be an earnings shortfall to end the year due to Y2K concerns; the stock plummeted even though this was a short-term problem. It seemed like a good buying opportunity. Certainly, hindsight is 20-20.
Some stocks are considered "Wall Street Darlings" and are spoken of well by "The Street" in most situations. It reminds this writer of the "teacher's pet" in school -- SCARY FEELING! An example may be General Electric (NYSE: GE), partially due to the fact that Jack Welch will likely retire soon, which should create uncertainty in the stock. However, the public doesn't hear many money managers discussing what will happen (if anything) when Mr. Welch leaves. GE is a darling regardless. Tyco (NYSE: TYC) used to be a darling, but when accounting issues arose, the stock quickly fell from favor.
Does anything else affect our stocks? Some members of upper management guide analysts as to future earnings. Executives "talk down" future earnings in order to keep estimates low, thus making it easier for the company to beat the Street. This makes the company look better come earnings season, and this helps increase the stock's price. Investors should compare current results to the same period of one year ago, rather than just to consensus estimates from analysts.
Finally, influential analysts and money managers are able to move stocks, sectors, and the stock market merely by an upgrade or a downgrade, whether they are right or wrong. They can affect our portfolio with their public opinions, at least (and thankfully only) in the short term.
Many other factors impact the stock market, meaning that investing is not outright easy. It is part analysis, part forecasting, part psychology, and part opinion, among other things. Study hard and hopefully you'll make Foolish choices for your portfolio!
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