Four Of Many Market-Moving Forces

11/23/2009


Often, pundits attribute market movements to a single cause. Don’t fall into that trap.

Simple answers feel good. But the savvy investor realizes that the U.S. stock market, a fast-moving bazaar featuring more than 6,000 stocks with a total market value of more than $12 trillion, is far too big to be consistently moved by only one lever.

Huge news — like the start or end of a war, unexpected action by the Federal Reserve, or profit surprises from several important companies — can move stocks in the short term. But we’ve all seen markets react strongly to breaking news before bouncing back, or continue an upward or downward move despite news that would seem to support a divergent trend. The truth is that the market’s movements are nearly impossible to predict in the short term, partly because they depend on so many variables.

For the rest of this column, I’ll talk about four of those market-moving forces likely to figure prominently in the headlines over the next year.

Oil prices: High energy prices raise the cost of doing business for many companies. But over time, major stock indexes tend to rise and fall along with oil prices, partly because oil prices tend to rise when the global economy is strengthening. Per-barrel oil prices have more than doubled from February lows, but at roughly $79 remain 45% off all-time highs. If per-barrel oil prices remain between $70 and $90 as many analysts expect, both producers and consumers of energy should be able to make money, which should in turn be good news for stocks.

The weak dollar: Since the start of the year, the U.S. dollar has fallen 6% relative to the euro, 14% relative to the Canadian dollar, and 13% relative to the British pound. Weakness in the dollar helps exporters, as goods produced in America become cheaper to foreign buyers. It also tends to boost commodity prices, favoring energy and materials companies. But over time, the strength of a country’s currency can become a proxy for the strength of its economy — at least in the eyes of outsiders. Earlier this month, a Chinese banking official said the weak dollar created “unavoidable risks for the recovery of the global market.” While a weak dollar is not necessarily bad for the U.S. economy, it can create problems of perception, which can in turn affect stocks.

Inflation: The consumer price index (CPI), a measure of the prices of a basket of goods and services, fell 0.2% in the year ended October. But the core CPI, which excludes food and energy, rose 1.7%. While energy prices have risen in recent months, overall inflation remains in check. The Blue Chip Economic Indicators consensus projects 2.0% inflation in 2010. A big upside surprise on inflation would be bad news for stocks, as the bullish case assumes low inflation will allow the Federal Reserve to keep short-term interest rates low.

Housing: The good news in this sector is that the bad news is no longer getting worse. Home sales are on the rise, though they remain well below levels common during better economic times. Inventories are shrinking, and the pace of declines in home prices is moderating. However, the first-time homebuyer tax credit has made the underlying strength of the market difficult to assess. More meaningful tests of the housing market’s health will occur when the credit expires in April, and when housing prices once again begin to rise.

Will any of these forces alone be enough to spark a lasting upward or downward move? Probably not. But investors looking for hints about the future — or simply a reason why the market may have made an unexpected near-term move — should pay attention to all four.


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