Mark Hauser, private equity expert, highlights the importance of analyzing various factors related to stock market investments.
Stock market investments are historically an inexact science. Each potential purchase requires an investor’s exhaustive due diligence and a high tolerance for uncertainty. Experienced investors are cognizant of stock market investments’ inherent risks.
Private equity principal Mark Hauser acknowledges the market’s risks while remaining keenly aware of stock investments’ potential rewards. He identifies thorough due diligence strategies for individual stocks and recommends attention to market indices.
Finally, Mark Hauser highlights external factors that can affect the market’s performance. Multiple variables can be in play simultaneously. By consistently devoting attention to all three areas, investors can better make an informed decision.
Investors’ Analysis of Individual Stocks
Before making their “go/no go” decision, market-savvy investors equip themselves with every possible bit of relevant information. They begin on the micro scale, evaluating individual stocks according to accepted analytical criteria. Many investors also have their own proprietary stock evaluation methods.
As part of their targeted stock analysis, investors also review earnings reports, determine the factors behind the cessation of dividends, and delve into merger or acquisition logistics. On a larger scale, investors look for current and projected trends in the company’s industry.
Finally, investors scour the news for stories that could present a specific company in a positive or negative light. A stellar new medical breakthrough could help the stock price to skyrocket. Conversely, the CEO’s completely inappropriate statement at a news conference could send the stock price diving toward the bottom.
Investors’ Scrutiny of Stock Indices
To gain a larger scale (or macro) view of the market’s performance, many seasoned investors also regularly analyze stock indexes (or stock indices). As Mark Hauser explains, a stock index is the aggregated price of multiple stocks in different industries.
When an index moves upward, that represents the net effect of each individual stock’s movement. The same principle applies for a downward-trending stock index. Major United States stock indices include the Dow Jones Industrial Average (or the DJIA) and the S&P 500.
Collectively, a stock market index functions as a data snapshot of the listed companies. Investors utilize this data and compare current and past prices for that index. Equipped with this knowledge, investors can gauge the market’s aggregate performance.
Analysis of Factors Affecting Stock Market Performance
Multiple external factors can help to drive short-term stock market fluctuations and long-term market performance. Hauser Private Equity’s Mark Hauser recommends that investors develop an awareness of each factor’s effect on the market. He also emphasizes the factors’ continued interplay as the market responds to complex scenarios throughout each trading day.
United States Government Policies
The United States government’s policies can have a significant effect on the stock market and other financial markets. To illustrate, the U.S. Federal Reserve (or the Fed) can raise interest rates to slow the rate of inflation.
Conversely, the Fed can lower interest rates to stimulate economic growth in a lagging economy. Both tactics are part of the government’s monetary policy.
The U.S. government also practices fiscal policy. Here, the government increases or decreases its spending to stabilize price swings and/or alleviate the effects of unemployment.
Both sets of policies will affect the stock market in different ways. The government implements a specific policy according to the factors in play at the time.
The United States’ Economic Health
The state of the United States economy can have a ripple effect on the stock market. In a strong economy, consumers have more confidence in their personal financial positions. As a result, they spend more on goods and services and are inclined to make investments.
When consumers spend and invest more, stock prices also tend to rise. Concurrently, companies have the resources to expand and raise their profits. This may also help stock prices to increase.
The converse is also true. When the economy is in a downturn, consumers lack confidence in their financial futures. They are more likely to save money rather than spending it on non-essential purchases. To illustrate, they may continue using older appliances rather than buying new ones. They may cancel a planned vacation and take a “staycation” instead.
When consumers tighten their wallets, businesses find it more difficult to expand and increase their profits. The net effect is often a decrease in stock prices.
The United States’ Gross Domestic Product
The United States’ gross domestic product (or GDP) number refers to the aggregate value of the end-stage goods and services produced in the country. A change in the GDP is an accepted barometer of the United States’ collective economic health.
A higher GDP number leads to optimism about economic growth and often helps to increase stock prices. Consumers often respond to the good news by spending more money, which boosts the GDP even further.
However, a lower GDP has the opposite effect. As economic activity slows down, consumer confidence decreases, which can lead to lower stock prices. In turn, other economic forces can help to depress the GDP number even further.
When consumer goods and services prices are rising, inflation has begun to take hold. If consumers are spending more of their dollars on essentials, they have less money for discretionary spending. To illustrate, consumers might postpone the purchase of higher-ticket items such as new vehicles or dining and entertainment.
Concurrently, businesses are also seeing rising raw materials, production, and distribution costs. Companies may transfer these costs to consumers in the form of higher prices. Alternatively, firms can enjoy a better competitive position by absorbing the extra expenses, although that causes profits to fall. As businesses see reduced revenues and profits, their stock prices often drop as well.
Experienced private equity investor Mark Hauser notes that a narrow window of inflation is regarded as desirable for the economy. At a certain point, however, a higher inflation rate begins to negatively affect the United States’ economic growth. When this occurs, the Fed considers increasing interest rates. This strategy is designed to slow the inflation rate and stimulate the economy.
News of the United States’ weekly unemployment numbers can potentially impact the stock market (for good or bad). When unemployment rates are higher than expected, it means that an increasing number of workers are looking for jobs but cannot find them.
As the unemployment rate increases, more consumers lack a means of reliable income. This causes them to pause their discretionary spending and focus their resources on essentials such as groceries and gas.
Not surprisingly, this discouraging job news leads to a drop in consumer confidence. As previously stated, this widespread pessimism can often lead to a decrease in stock prices.
Natural Disasters and Large-scale Market Disruptions
A high-impact natural disaster has the potential to affect the stock market. In late August 2005, Hurricane Katrina devastated New Orleans. The Gulf Coast’s energy production was also severely affected, leading to an immediate spike in fuel prices. Not surprisingly, oil companies’ stocks rose accordingly, and the Dow Jones industrial average climbed 0.63 percent.
An energy disruption of a different sort affected a primary United States fuel pipeline in May 2021. Reports of a ransomware cyberattack led Colonial Pipeline to shut down its conduit that supplied Gulf Coast gasoline, diesel, and jet fuel supplies to New York’s major airports and harbor operations. The incident led to a rise in gasoline and diesel futures.
Domestic and Foreign Politics
Political implications can often play a role in stock market performance. To illustrate, United States investors may believe that one political party’s election sets up a favorable business environment. This optimism can lead to an upturn in the stock markets.
Not surprisingly, the investors may express pessimism about their prospects if the other party comes into power. This collective attitude could foretell an overall market downturn. Either way, especially strong political sentiment can lead to a more pronounced movement of the markets.
In a similar vein, a primary United States trading partner may conduct a national election. If the new leadership is friendly to American interests, United States stock markets may respond by trending higher. However, a hostile government’s election can lead to uncertainty, causing the market to trend downward.
Foreign Market Developments
In today’s global marketplace, other countries’ economic trends can directly and indirectly affect the United States stock market. First, when another country’s economy is in a downturn, American businesses are less able to sell goods and services to that market. Depending on the scale, this resulting decrease in revenue can lead to a drop in prices for individual stocks and potentially the larger market.
Developments in foreign stock exchanges can also impact the United States stock market. When a foreign stock exchange shows a substantial aggregate drop, American investors might expect some loss of value in the United States stock market.
Throughout each week’s stock market trading period, certain factors become more prominent while others diminish in importance. Mark Hauser says that investors should consistently monitor all factors that may affect the stock market while evaluating potential investment targets.
Published by Samantha Brown