Factors That Drive Stock Prices
Market sentiment. On a day-to-day basis, it’s impossible to predict what will happen in stock markets around the world. One day, the market is up on better-than-expected economic indicators (GDP, interest rates), and the next it’s down because of a new development in the sovereign debt crisis in EU and Greece or the real estate market in China.
Growth expectations. Research over the years has proven that higher GDP growth doesn’t necessarily translate into higher stock returns in a particular country. The correlation between the two is actually negative. Investors should pay attention to analysts’ expectations for higher or lower economic growth in a given country.
Valuation. In the long term, valuation plays an important role in driving stock prices. Price-to-earnings ratios (P/E ratios) are used to measure the value of stocks. Trailing P/E ratios track historical earnings, while measures like forecasted P/E ratios track expected earnings. Both can be helpful in determining how expensive or cheap a stock (or stock market) looks.
Central bank activity. Generally, you want to invest in stocks in a country in which the central bank is lowering interest rates. Incidentally, interest rate changes can also cause money to flow into and/or out of certain markets.
Momentum. Despite what’s going on in the economy or with a particular company’s fundamentals, investors will sometimes trade stocks based on momentum.
Stock Market Crash, A Historical Pattern? by Wim Grommen