This post was originally published on this site.
00:00 Brooke
Allie, first question, why do stocks rise when economic data is showing some signs of weakness?
00:06 Allie
Hey Brooke, and I love this question and it’s because markets, they don’t always trade when it comes to the data, the numbers in front of them. They trade on expectations. So if weak data suggests that the Fed could cut rates sooner, what does that mean? It means borrowing costs are going to get cheaper. It means financial conditions are going to ease, asset prices are going to rise. So that’s why you can get bad news for the economy that sometimes is good news for the stock market. That’s not always the case, but we tend to see that uh when investors are really focused on the policy aspect, aka, what the Fed is going to do with interest rates.
00:46 Brooke
And next question, what exactly drives stocks? Is it fundamentals, news, flows, positions or future outlook?
00:54 Allie
All of the above, Brooke. And at different moments, at different times, at a different scale, let’s dig into those four drivers. So fundamentals, that’s earnings, margins, revenue, basically all the components that make up a company’s balance sheet. And as an investor, you want to make sure that your balance sheets, that your fundamentals, whatever companies that you’re invested in, that they are strong. Second is news. So this is the business that we’re in. This is any surprise that investors uh uh need to reprice when it comes to risk or opportunity. Third, flows and positioning. So this is how investors are positioned heading into a particular event. So, for example, if everyone is bullish, sometimes a reaction can fall a bit flat. and that’s what we see with some of these tech names, Nvidia, for example. Sometimes they have really strong earnings, but because the valuation is so high and people are very long on the stock, you get a bit of that muted reaction. And then finally, future outlook. You have to remember that the market is a discounting machine, always looking ahead to the future, six months out, 12 months out. It’s all about those expectations. But I will say Brooke, when it comes to those short-term reaction, that’s usually due to positioning or a policy change, like we were talking about the Fed cutting interest rates.
02:08 Brooke
Allie can now with all your year-end questions answered. Thanks so much.