Stock Market: What Moves the Price of a Stock? What do you want to know?
The stock market is volatile and unpredictable. Here’s why stock prices move and how to navigate them as an investor.
For my money, USA Today
The Dow Jones Industrial Average hit a new milestone on Friday, closing above 40,000 for the first time and underscoring the stock market’s resilience despite volatile inflation and volatility surrounding the prospect of Federal Reserve interest rate cuts.
„The importance is psychological,” said Jason Ware, chief investment officer at Albion Financial Group. For investors, „it makes us feel like we’re doing the right thing”.
For those not in the market, this is a clarion call. „Make sure you’re invested in the market so you’re benefiting from the compounding effects over time,” he says. „You better be in the room.”
The Dow closed up 134 points, or 0.34%, at 40,003.59. The S&P 500 added 0.12%, while the Nasdaq Composite fell 0.074%.
How’s the Dow doing today?
The Dow’s latest spike was fueled by Wednesday’s inflation report, which showed inflation cooling for the first time in months. Investors saw the report as promising that the central bank could move forward with interest rate cuts as soon as September.
The data shows Softening Retail And a stronger-than-expected first-quarter earnings reporting period has boosted investor confidence, according to Sam Stovall, chief investment strategist at investment research and analysis firm CFRA Research.
Why is the Dow up?
The Dow has gained more than 6% this year. Stocks fell in April as investors worried about the central bank pushing back on interest rate cuts to tackle stickiness in inflation. The index began to recover this month, as new reports indicated Job growth is slower than expectedCooling inflation and Federal Reserve Chairman Jerome Powell reiterated that further interest rate hikes are unlikely.
“Investors are prospectors. And they’re eagerly anticipating a cut in interest rates,” Stovall said. „They’re also reassured by the possibility that we’ll avoid a recession.”
CBI Report: Inflation eases in April as prices of eggs, pork and bread fall
What does Dow at 40,000 mean for my 401(k)?
While the 40,000 milestone is attention-grabbing, the number remains small for investors.
„40,000 is a big milestone, but at the end of the day there’s not much difference between 39,999 and 40k,” Ryan Dedrick, chief market strategist at The Carson Group, said in an emailed statement Thursday. „However, it’s a great reminder of how far we’ve come.
Last year, he says, investors kept hearing that a recession was coming and that stocks would be worse. „It’s another reminder that investors who stick to their long-term plans and ignore scary headlines will be rewarded.”
But the arbitrary number is small for investors’ pension funds. With only 30 blue-chip stocks, the index isn’t the best measure of 401(k) strength.
A better measure is the S&P 500, as 401(k) accounts are more likely to include S&P 500 index funds than those linked to the Dow. The stock market index tracks the performance of the country’s 500 largest public companies.
The S&P 500 has hit its own milestones this year. The index closed above 5,300 on Wednesday and closed at 5,303 on Friday.
What are the downsides of the Dow 40,000?
The downside of the Dow 40,000 is that some investors may think the market is expensive and may be ready to pull back.
„If you’re on the rugged side, you might think it’s too much,” Ware says.
Ware says the average price of stocks in the blue-chip index is 20 times earnings over the next 12 months. That’s above a five-year average price-earnings ratio of 19.2 and a 10-year multiple of 18, Ware says. So he says it is a bit expensive but not too much.
There are valid reasons for the high value, Ware says. The economy is still strong, corporate earnings are solid and the Fed is expected to cut interest rates this year. Values are typically higher when the Fed shaves rates because it shifts investors from lower-yielding bonds and other fixed-income assets into stocks.
In general, as a blue-chip index rises, the Dow takes less time to reach its historical milestones because the 10,000 jump is less likely on a percentage basis.
It took the Dow 26 years to climb from 1,000 to 10,000 or 17.8 years to go from 10,000 to 20,000 — a period of slow growth following the dot-com bust of the early 2000s and the Great Recession of 2007-09.
It took nearly four years for the Dow to climb from 20,000 to 30,000 and about three years to reach 40,000 following a strong recovery from the pandemic.