On November 22, 2016, the Dow Jones Industrial Average crossed over 19,000 for the first time ever! In fact, all three major averages, the Dow, the S&P 500 and the Nasdaq, closed at record highs. Over the long term, the stock market has continued to grow and create value for investors. This is because the market will generally reflect the growth in the US economy and the companies that make it up. And the US economy has been growing for decades. That being said, I thought I’d take some time and talk about how stocks move in the short term.
I will very often get the question, “why is XYZ stock up today?” The quick and snarky answer is, “more buyers than sellers”. And while this is true, I usually keep this answer to myself. However, it is important to remember that the stock market is a market just like any other. And, the basis of price movement is supply and demand. When there are more sellers of a stock, there is more supply, and the price will tend down. When there are more buyers, there is more demand, and the price will tend up. Simple, right…? Of course not!
Obviously, the real answer lies in what causes investors to want to buy or sell a stock. And this is more art than science. There are many strategies for stock picking, but two popular ways are fundamental analysis and technical analysis. Fundamental analysis is the method of looking at financial and non-financial factors to determine a company’s intrinsic value. These factors may include: income statements, cash flow, the management team, the sector the company is in, the economy, etc. When compared to the current price of a stock, this intrinsic value can tell you whether a company is overvalued or undervalued. This analysis can also help you predict what the stock price might be in the future.
Technical analysis does not look at the company’s situation at all. Instead, it looks at the way the stock traded in the past and determines whether the stock should go up or down. This seems a little weird, but it is based on the belief that the current stock price reflects all relevant information (therefore there is no overvalued or undervalued situation) and that stocks trade in predictable patterns. The challenge here is discerning the patterns, which are often only evident with hindsight.
There are other things that influence a stock’s price on a day to day basis. Two of which are headlines and earnings. When a company is in the news for either good or bad stories, its stock price will often be affected. It’s important to know that these stock price moves are often knee-jerk reactions and overdone. It’s also important to note that a stock will usually move on the news itself and not as much on the action the news is reporting. For example, the news of a company cutting 10% of their work force will move the stock, whereas the actual cutting of the jobs will not. This is because the stock market will price in these moves in anticipation of them happening.
Earnings reports will definitely move a stock price, as well they should. These are the quarterly reports of how a company is doing. They will include net income (earnings) and revenues (sales) among other relevant financial data. Importantly, most companies also issue out guidance on how they expect to do in the near future. This guidance is often more impactful than the actual past earnings. The way that a stock will move based on its earnings and guidance is relative to the expectations investors have. A company may come out with record earnings, but if they fall short of expectations, then its stock price will fall. This is because the current stock price will incorporate how well the investors think a company should do.
The stock market is a complex system with many moving parts. The reasons that a stock price will move are as varied as the ways that investors use to value a company. Remember that the stock market is indeed a market. Every seller needs a buyer. Investors have different views and place different values on things. And this is a good thing. If everyone thought the same way, the market wouldn’t exist. And as volatile as the market can be in the short term, over time it has provided an important way to achieve long term growth.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
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A Financial Advisor registered through CUSO Financial Services, L.P., Gavin has 25 years of experience as an advisor in the Puget Sound area.
“I believe every client is unique and deserving of a personalized financial plan that will help them reach their individual financial goals. Before I make any recommendations, I like to get to know my clients. By asking the right questions, and developing an honest, trusting relationship, I can really get a sense of what’s going to work best for them.”
Gavin graduated from the University of Washington with a BA in Business Administration and started his financial career with US Bank in the Investment Department. Prior to joining Verity in 2006, he spent eight years with Piper Jaffray.
So what is Gavin’s vision for his dream retirement?
“My dream retirement would be absolutely worry free: financially, emotionally, and in every aspect of life. My finances would be in order so expenses for travel, luxuries, and gifts for the kids, grandkids, and great-grandkids would be taken care of. My kids would be financially sound, so I would be confident in their prosperity. This would give me the freedom to travel and play and do whatever it is I want to do.”
When Gavin’s not working, he enjoys spending time with friends and family, watching Husky football and taking weekend trips around the Northwest.
Gavin is registered to transact securities business in the states of AZ, CA, CO, FL, HI, ID, IL, KS, MN, NV, NY, OR, UT, VA and WA.
*Non-deposit investment products and services are offered through CUSO Financial Services, LP (“CUSO Financial”) (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CUSO Financial. Verity Credit Union has contracted with CUSO Financial to make non-deposit investment products and services available to credit union members. Atria Wealth Solutions, Inc. (“Atria”) is not a broker-dealer or Registered Investment Advisor and does not provide advice. CUSO Financial is a subsidiary of Atria.
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