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So far, the third-quarter earnings season has been full of treats. According to FactSet, 37% of S&P 500 companies have reported. Of those, 75% have beaten earnings estimates and 59% have beaten sales estimates. But with 170 S&P 500 companies releasing earnings this week, we’re seeing more tricks than treats. This includes reports from five of the Magnificent Seven: Alphabet Inc. (GOOGL), Amazon.com, Inc. (AMZN), Apple, Inc. (AAPL), Meta Platforms, Inc. (META) and Microsoft Corporation (MSFT)…..Continue reading….
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Source: Investor Place
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The stock market is one of the most important ways for companies to raise money, along with debt markets which are generally more imposing but do not trade publicly. This allows businesses to be publicly traded, and raise additional financial capital for expansion by selling shares of ownership of the company in a public market.
The liquidity that an exchange affords the investors enables their holders to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as property and other immoveable assets. History has shown that the price of stocks and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood.
An economy where the stock market is on the rise is considered to be an up-and-coming economy. The stock market is often considered the primary indicator of a country’s economic strength and development. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption.
Therefore, central banks tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the raison d’être of central banks. Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security.
This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction. The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as possibly employment. In this way the financial system is assumed to contribute to increased prosperity, although some controversy exists as to whether the optimal financial system is bank-based or market-based.
Recent events such as the Global Financial Crisis have prompted a heightened degree of scrutiny of the impact of the structure of stock markets (called market microstructure), in particular to the stability of the financial system and the transmission of systemic risk. A transformation is the move to electronic trading to replace human trading of listed securities.
Changes in stock prices are mostly caused by external factors such as socioeconomic conditions, inflation, exchange rates. Intellectual capital does not affect a company stock’s current earnings. Intellectual capital contributes to a stock’s return growth. The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information at the current time.
The ‘hard’ efficient-market hypothesis does not explain the cause of events such as the crash in 1987, when the Dow Jones Industrial Average plummeted 22.6 percent—the largest-ever one-day fall in the United States. This event demonstrated that share prices can fall dramatically even though no generally agreed upon definite cause has been found: a thorough search failed to detect any ‘reasonable’ development that might have accounted for the crash.
It seems also to be true more generally that many price movements (beyond those which are predicted to occur ‘randomly’) are not occasioned by new information; a study of the fifty largest one-day share price movements in the United States in the post-war period seems to confirm this. A ‘soft’ EMH has emerged which does not require that prices remain at or near equilibrium, but only that market participants cannot systematically profit from any momentary ‘market anomaly‘.
Moreover, while EMH predicts that all price movement (in the absence of change in fundamental information) is random (i.e. non-trending), many studies have shown a marked tendency for the stock market to trend over time periods of weeks or longer. Various explanations for such large and apparently non-random price movements have been promulgated.
For instance, some research has shown that changes in estimated risk, and the use of certain strategies, such as stop-loss limits and value at risk limits, theoretically could cause financial markets to overreact. But the best explanation seems to be that the distribution of stock market prices is non-Gaussian (in which case EMH, in any of its current forms, would not be strictly applicable). Other research has shown that psychological factors may result in exaggerated (statistically anomalous) stock price movements (contrary to EMH which assumes such behaviors ‘cancel out’).
Psychological research has demonstrated that people are predisposed to ‘seeing’ patterns, and often will perceive a pattern in what is, in fact, just noise, e.g. seeing familiar shapes in clouds or ink blots. In the present context, this means that a succession of good news items about a company may lead investors to overreact positively, driving the price up. A period of good returns also boosts the investors’ self-confidence, reducing their (psychological) risk threshold.
Another phenomenon—also from psychology—that works against an objective assessment is group thinking. As social animals, it is not easy to stick to an opinion that differs markedly from that of a majority of the group. An example with which one may be familiar is the reluctance to enter a restaurant that is empty; people generally prefer to have their opinion validated by those of others in the group.
In one paper the authors draw an analogy with gambling. In normal times the market behaves like a game of roulette; the probabilities are known and largely independent of the investment decisions of the different players. In times of market stress, however, the game becomes more like poker (herding behavior takes over). The players now must give heavy weight to the psychology of other investors and how they are likely to react psychologically.
Stock markets play an essential role in growing industries that ultimately affect the economy through transferring available funds from units that have excess funds (savings) to those who are suffering from funds deficit (borrowings) (Padhi and Naik, 2012). In other words, capital markets facilitate funds movement between the above-mentioned units. This process leads to the enhancement of available financial resources which in turn affects the economic growth positively.
Economic and financial theories argue that stock prices are affected by macroeconomic trends. Macroeconomic trends include such as changes in GDP, unemployment rates, national income, price indices, output, consumption, unemployment, inflation, saving, investment, energy, international trade, immigration, productivity, aging populations, innovations, international finance.
Increasing corporate profit, increasing profit margins, higher concentration of business, lower company income, less vigorous activity, less progress, lower investment rates, lower productivity growth, less employee share of corporate revenues, decreasing Worker to Beneficiary ratio (year 1960 5:1, year 2009 3:1, year 2030 2.2:1), increasing female to male ratio college graduates.
Sometimes, the market seems to react irrationally to economic or financial news, even if that news is likely to have no real effect on the fundamental value of securities itself. However, this market behaviour may be more apparent than real, since often such news was anticipated, and a counter reaction may occur if the news is better (or worse) than expected.
Therefore, the stock market may be swayed in either direction by press releases, rumors, euphoria and mass panic. Over the short-term, stocks and other securities can be battered or bought by any number of fast market-changing events, making the stock market behavior difficult to predict. Emotions can drive prices up and down, people are generally not as rational as they think, and the reasons for buying and selling are generally accepted.
Behaviorists argue that investors often behave irrationally when making investment decisions thereby incorrectly pricing securities, which causes market inefficiencies, which, in turn, are opportunities to make money.However, the whole notion of EMH is that these non-rational reactions to information cancel out, leaving the prices of stocks rationally determined.
Many strategies can be classified as either fundamental analysis or technical analysis. Fundamental analysis refers to analyzing companies by their financial statements found in SEC filings, business trends, and general economic conditions. Technical analysis studies price actions in markets through the use of charts and quantitative techniques to attempt to forecast price trends based on historical performance, regardless of the company’s financial prospects.
One example of a technical strategy is the Trend following method, used by John W. Henry and Ed Seykota, which uses price patterns and is also rooted in risk management and diversification. Additionally, many choose to invest via passive index funds. In this method, one holds a portfolio of the entire stock market or some segment of the stock market (such as the S&P 500 Index or Wilshire 5000). The principal aim of this strategy is to maximize diversification, minimize taxes from realizing gains, and ride the general trend of the stock market to rise.
Responsible investment emphasizes and requires a long-term horizon on the basis of fundamental analysis only, avoiding hazards in the expected return of the investment. Socially responsible investing is another investment preference.
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