Skip to main content

November 22, 2023

Why Do Stocks Go Up . . . And Down?

As much as private investors (as well as some Wall Streeters) think that there’s a mystical force that determines stock prices, the reality is anything but.  What drives stock prices, and the overall stock market, is profitability.  When companies make more money, their stock prices rise over time. As the country’s economy grows, the stock market rises.

Patterns of growth, however, are anything but linear.  Major events, both positive and negative, regularly disrupt the long-term path of progress.  Wars, bank failures, and periods of business weakness are just a few of the issues that alarm investors and cause them to suffer the most serious concern: uncertainty. 

When the view of economic prospects ahead becomes cloudy, investors start by becoming fearful.  Then they hit the panic button.  Invariably, these significant shifts in psychology push stock prices lower.  That, in turn, leads more astute investors to take advantage of the pullbacks, which for shares of healthy companies will ensure broader gains for them as things get back to normal.

Healthy companies such as Procter & Gamble, Automatic Data Processing, and UnitedHealth Group are examples of consistent annual progress over extended periods.  Indeed, for the latest five years, each of these companies managed to improve their net income, so it should come as no surprise that their shares either matched or bettered the results of the overall market (S&P 500).


As you can see from the patterns of this chart, the path of least resistance was up, marred only by the drop at the onset of the recent pandemic.

Consistent progress over time is the exception, not the rule.  Few companies have been capable of moving ahead without even the briefest of interruptions.

The flip side of consistency is cyclicality, a prime example of which is companies related to the construction industry.  A look at the price charts of those stocks will illustrate the considerable impact of the ongoing ups and downs that comes with that territory.

It’s essential to underscore the importance of continuing progress from regular company operations.  Investors must ignore nonrecurring items (e.g., big gains from asset sales), which rarely have any bearing on share prices unless the proceeds from same are reinvested to accelerate organic growth.

N. Russell Wayne, CFP

Sound Asset Management Inc.

Weston, CT  06883

203-895-8877

www.soundasset.blogspot.com 

Comments

Post a Comment

Popular posts from this blog

Sound Advice: July 16, 2025

Fixed annuities are poor investments Fixed annuities are often criticized as poor investments for several reasons, despite their reputation for providing stable, predictable income.  Here are the key drawbacks and concerns:   High Fees and Commissions Internal Fees:  Fixed annuities can carry a range of fees, including administrative charges, mortality expense risk fees, and rider fees. These can add up to 2%–4% per year, significantly eroding returns over time. Commissions:  Sales agents and financial advisors often receive high commissions for selling annuities—sometimes as much as 5%–8% of the invested amount. This creates a financial incentive for advisers to recommend them, even when they may not be the best fit for the client. Comparison to Other Investments:  Mutual funds and ETFs typically have much lower fees and commissions, making them more cost-effective for long-term growth. Limited Growth a...
Post a Comment
Read more

Sound Advice: October 8, 2025

How many investors have outperformed the stock market over the last 20 years? Very few investors have outperformed the stock market over the past 20 years.   Data shows that only about 6% to 8% of actively managed equity funds in the U.S. beat the market over this period, with the vast majority—over 90%—underperforming the S&P 500 or equivalent broad indexes. Percentage of Investors Beating the Market Only 8% of equity funds investing in large companies managed to outperform the market over a recent 20-year span. About 94% of all domestic funds underperformed the S&P 1500 Composite Index from 2005-2024. Over shorter timeframes (5-10 years), typically fewer than 15-20% of fund managers beat the S&P 500, and performance persistence is rare. Why It Is Rare The S&P 500’s high returns have proven immensely difficult to beat, especially as indexing has become popular and markets have ...
Post a Comment
Read more

Sound Advice: January 15, 2025

Why investors shouldn't pay attention to Wall Street forecasts   Investors shouldn't pay attention to Wall Street forecasts for several compelling reasons: Poor accuracy Wall Street forecasts have a terrible track record of accuracy. Studies show that their predictions are often no better than random chance, with accuracy rates as low as 47%   Some prominent analysts even perform worse, with accuracy ratings as low as 35% Consistent overestimation Analysts consistently overestimate earnings growth, predicting 10-12%                 annual growth when the reality is closer to 6%.   This overoptimism can                 lead investors to make overly aggressive bets in the market. Inability to predict unpredictable events The stock market is influenced by numerous unpredictable factors, including geopolitical events, technological changes, and company-specific news.   Anal...
Post a Comment
Read more