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 8, 2020

Jobs Are Up, But So Are New Infections Through the spring months, m ost of the economic data was extremely negative, with record declines in employment and consumer spending.  The speed of that decline had no modern precedent. We are now in a recession.   The shortest recession on record occurred in 1980 and lasted just six months.  Second place goes to a seven-month recession in 1918-19, which was tied to the Spanish flu pandemic.  The big question is: When will this recession end? Given surprisingly strong data in May, April may have been the bottom of this economic cycle.  If so, it will have been the shortest recession on record.  With massive support from the Federal Reserve, the federal government, and the reopening of previously closed businesses, employment surged unexpectedly.  At the same time, pent-up demand, stimulus checks, and generous unemployment benefits led to a reacceleration of commercial activity. Still, not all is rosy.   In his recent testimo
Post a Comment
Read more

Sound Advice: December 20, 2023

How To Finance A New Home When Interest Rates Are High Financing a new home when interest rates are high can be challenging, but it's not impossible. Here are some strategies and tips to consider: 1. Improve Your Credit Score: A higher credit score can qualify you for a lower interest rate, even when rates are high. Pay your bills on time, reduce your debt, and correct any errors on your credit report to improve your credit score. 2. Save for a Larger Down Payment: A larger down payment reduces the amount you need to finance. Lenders might offer more favorable terms if you can make a substantial down payment. 3. Shop Around for the Best Rates: Different lenders offer different interest rates and terms. Obtain quotes from multiple lenders and compare their offers. Don’t just focus on banks; credit unions and online lenders might have competitive rates too. 4. Consider Adjustable-Rate Mortgages
Post a Comment
Read more

Sound Advice: December 13, 2023

What You Need To Know About Long-Term Care Insurance Long-term care insurance (LTCI) is a type of insurance that helps cover the costs of long-term care services, such as assistance with activities of daily living (ADLs) such as bathing, dressing, and eating. It can also cover the expenses associated with care in a nursing home, assisted living facility or at home by a professional caregiver. Here's what you need to know about long-term care insurance: 1. Not Covered by Health Insurance or Medicare: Long-term care services are generally not covered by health insurance or Medicare, which only provide limited coverage for skilled nursing care and rehabilitative services. Medicaid covers long-term care, but you need to meet strict income and asset requirements. 2. Costs of Long-Term Care: Long-term care can be expensive and can quickly deplete your savings. LTCI helps to cover these costs, providing financial security and ens
Post a Comment
Read more