Far too often individuals buy stocks without contemplating the bigger picture. In other words, they buy shares in a company without contemplating market forces or macroeconomic factors that can drastically influence the outcome of their investments.
This article will look at outside factors such as key market forces and economic metrics that investors should keep tabs on. Find out why a stock might take a nosedive and what signs you can watch for to help you avoid it.
Sector Earnings Trends
Have large companies and/or market leaders that operate in the same sector as the company in which you own stock recently reported earnings? Were they positive or negative?
Either way, the earnings of industry leaders can have an impact on the way the stock you own trades - for better or for worse.
Peruse earnings calendars on financial websites, and be aware that within two to four weeks after the most common quarter ends (March, June, September and December) there are bound to be a host of earnings reports in the public domain that can have an impact on the stock you own. If the leading company in the industry reports poor earnings and weaker guidance due to general conditions, it may not bode well for your smaller cap stock.
To be clear, this doesn't mean that investors should avoid buying a stock simply because a competitor might report bad earnings. Nor does it mean that they should buy a stock even if they're certain a competitor will release good earnings. What it does mean is that they should be aware that those earnings could have an adverse (or a positive impact) on the price of their stock.
Have unemployment or housing numbers, or any other market data come out that could influence the market or adversely impact a certain sector? Be aware that throughout the month a stream of economic data is released that could influence both the overall market and the price of the stock that you own.
In addition to housing and unemployment data (as mentioned above), there are other key numbers, such as inflation and GDP, that investors should be on the lookout for:
Gross Domestic Product (GDP)
GDP numbers show the pace at which the domestic economy is growing (or not growing). Their release often has a huge impact on home builders, as well as manufacturers and retailers of big-ticket items. The logic here is that if the economy is slowing, consumers will be reluctant to spend money on non-essential items.
Producer Price Index (PPI)
The PPI numbers depict the average change in prices received by producers for their goods. Rising prices can be a sign of inflation, which in turn can cause the Federal Reserve to raise interest rates (in order to slow the economy). That can be bad for both the stock and the bond markets.
Durable Goods Orders
Durable goods data depicts orders for goods with a lifespan of more than three years. It is indicative of the overall health of the manufacturing sector. If you are investing in a company related to manufacturing (or the sale of manufactured goods), it is important to evaluate this data. For other relevant economic data release information, be sure to check out the Federal Reserve's website.
Federal Open Market Committee (FOMC) Decisions
The Federal Open Market Committee is the policy making body of the Federal Reserve. As such, its members are responsible for the direction of interest rates. Not surprisingly, their actions can move markets. In fact, every minute of the FOMC's meeting is usually dissected by analysts and economists for hidden meanings. All sectors and industries can be positively or negatively impacted by what this body says and does. So ignore it at your peril!
Overall Market Direction
A rising tide lifts all ships, and vice versa. Based on this logic, try to avoid buying into or selling a position when the stock market as a whole is trading against you. The fact is that you could invest in the best company in the world with the greatest earnings potential ever seen. But unless stocks in general are being accumulated by the investing public that stock may be stuck in neutral.
On Wall Street, there is an old saying that applies to virtually any situation when it comes to buying or selling a stock: Let the trend be your friend.
Overseas Market Action
Far too many investors seem to think that our markets are some sort of island - that our trading isn't influenced by any outside factors. Overseas markets in Europe and Asia, however, can have an enormous impact on U.S. stocks. In fact there have been several major multi-day and longer-term sell-offs in overseas markets in recent years that have been blamed for major losses in the Dow and the S&P 500.
For example, the Asian financial crisis in 1997-1998 caused major declines in the Dow. In addition, in 2006 a major sell-off in the Chinese markets spilled over into domestic markets, causing the major indexes to erase much of their gains in the first quarter of 2006.
Commodity prices/trends can have an enormous impact on stocks. Despite this, most people overlook the price of things such as oil and cotton (two important components in many products), and their potential impact on corporate earnings.
Rising fuel prices, for example, can impact a variety of industries, although transportation stocks are usually the hardest hit. Homebuilders and retailers (which ship many of their goods to job sites/stores by truck) may also be hit quite hard. Rising cotton prices can impact the retail price of clothing and a variety of other products that use cotton. By extension, this could have a huge adverse impact on retailers and manufacturers of these products.
Information about oil and cotton prices, as well as a number of other commodities (ratings from sugar to a variety of precious metals) can be found on the New York Mercantile Exchange (NYMEX) website and the New York Board Of Trade (NYBOT) website.
The Bottom Line
There are many market and macroeconomic forces that impact stock trading and that investors should be aware of prior to buying or selling shares in any security. While it is necessary to heed these factors and forces, however, the most important thing to consider is the attractiveness of the company itself and whether it is worthy of an investment.