What Makes the Stock Market Go Up and Down?

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Contributor, Benzinga
Updated: August 27, 2021

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Every day, investors buy into and sell out of different positions in the stock market, causing the market value to move up and down throughout the day on all trading days. Movements in market indices provide a way to track how the stock market is doing at any given point in time. 

The stock market has exposure to many different sectors and sub-industries whose movements can be tracked by sector exchange-traded funds (ETFs). Changes in the stock market boil down to the basic economic principles of supply and demand. Underlying changes to supply and demand result from current events and economic reports.

How Often Does the Stock Market Fluctuate?

The stock market fluctuates daily, even on days where the market is closed. Larger swings in the U.S. tend to happen around the first week of each month when The U.S. Bureau of Labor Statistics releases its report on change in employment levels — a recent hot-topic through the economic recovery from the pandemic. Increased volatility also happens during what is known as “earnings season,” which is when publicly traded companies report financials and business operations for each of the four annual quarters.

Factors that Change the Stock Market

Here are some of the factors that move the stock market.

Supply and Demand

At its core, supply and demand are the basis for what causes the stock market to rise and fall. When demand for a stock or ETF (see What is an ETF?) rises, shares of the stock or ETF are bought up, causing the supply of shares at the current price available for purchase to decrease. This means that buyers need to be willing to pay more for shares, leading to increases in price for the stock or ETF. On the flip side, when demand drops, the supply of shares being sold is higher than the number of shares investors want to buy, causing the price to drop.

Let's use GameStop as an example. When a large number of investors began buying shares of GME, there were not enough shares available for sale to keep GameStop's share price in its normal range under $20. As a result, the massive buying caused GameStop's share price to rise above $200 since all the shares that were being sold under that range had been purchased.

But what causes the actual supply and demand for a stock to shift? Read below to find out.

Investor Sentiment and Current Events

Investor sentiment and current events go hand-in-hand. Current events can cause investors to change their outlook on certain stocks or industries. Current events typically include things like company reports or political news.

When investors see a company beat earnings expectations or see other positive news about a company, they tend to buy more shares of the company as their sentiment turns positive. 

For example, on July 22, 2021, Snapchat, Inc. hosted its earnings call and announced quarterly EPS of $0.10. This blew consensus expectations of  -$0.01 EPS out of the water, causing the share price to jump over 20%. Because Snapchat beat expectations and reported a profitable quarter, when experts expected a quarterly loss, investors saw that Snapchat was undervalued and rushed to buy shares, driving up the price.

Current events can cause investors to pull out of the market, buy into the market, or simply move their money around to industries that will likely benefit from the recent event.

For example, through the summer of 2021, Chinese stocks have been relatively underperforming the broader global market. This underperformance is the result of fears regarding Chinese regulation on publicly traded companies. As a result, Chinese stocks like NIO and Didi and market indices like the Shanghai Composite and Shenzhen Component have seen suppressions to their market caps. 

The COVID-19 pandemic is another macro-scale current event that caused a major shift in the stock market. Work from home catalyzed digital transformations, forcing many companies to adapt to a digital world. This resulted in the undoubted market domination of tech stocks, whose valuations continue to rise as a result of increasing revenues and product/service usage.

Reckless speculation can also cause the market to shift — such as in the tech stock collapse in the early 2000s when company valuations had reached levels never seen before at such a widespread scale.

The Economy

Economic reports and monetary policy can also affect the stock market. These encompass crashes in certain industries, violent downturns in certain businesses, interest rates and real estate crashes.

Let's use the stock market sell-off in March and April 2020 as an example. When investors realized that COVID-19 would shut down the world and force many global economies to go into lockdown, investors panicked and sold their investments as businesses would likely not generate cash flow in a closed economy. Airline and cruise stocks were especially hit as travel bans were put in place.

Jobs and inflation reports published by reputable organizations and government entities also give investors a glimpse into whether a given economy is growing, shrinking or remaining stagnant. For example, when unemployment is high, people are generally making less money, which means they have less disposable income. As a result, industries that rely on discretionary consumer spending, such as movie theaters or malls, would likely see their share prices fall since investors can expect them to generate less revenue.

Interest rates also have significant effects on the stock market. At the end of the day, investing in the stock market poses the risk that your money may lose value. Interest rates set by the Federal Reserve are seen as a minimum rate of return that investors can expect with zero risks. As such, with higher interest rates, investors are less inclined to put their money into the stock market as the potential return may not be worth the risk when they can see a guaranteed return on their investment through interest-generating assets (such as bonds). 

Additionally, higher interest rates mean a higher cost of borrowing for firms. As a result, growth stocks become more limited with how much they can borrow and spend, which can inhibit their ability to turn profitable and generate shareholder value. 

Trends in the economy can also affect where money is invested in the stock market and are typically determined by yield curves (see How Important Is The Yield Curve). Yield curves are a way to gauge whether the economy is in expansion, recession or stagnant but are not an absolute determinant of how the stock market will perform. When yield curves show an upcoming economic recession, investors are likely to pull out of cyclical industries and instead move into industries that typically perform well in economic downturns, such as consumer staples. On the flip side, when yield curves show economic growth, investors will put their money into growth industries such as innovative tech companies.

What Are the Best Stock Market Indicators?

The world has become increasingly globalized. As such events and trading in Asia and Europe can often affect U.S. stocks. U.S. exchanges are only open from 9:30 a.m. to 4 p.m. EST, meaning that U.S. exchanges are not representing ongoing global shifts 73% of the day, despite U.S. equities being traded around the clock. Trading on U.S. equities when the market is closed results in gaps that are not reflected in U.S. exchanges until its next open. 

This is where futures come into play. Futures track changes in international markets and are often a good indicator of how U.S. exchanges will perform when the market opens.

Benzinga provides a daily briefing on futures several hours before the market opens. You can find today’s peek into the markets here.

Treasury Yield Rates

As explained above, changes in interest rates — specifically the 10-year yield — carry significant power in affecting the market value. You can view the latest Treasury Bill Yields here

Where Can I Find Important Market Information Ahead of the Market Open?

Benzinga hosts a PreMarket Prep show every morning ahead of the open. The show is a live, premarket interactive show with two veteran traders and featured finance industry guests discussing market movers, key technical levels and trading ideas. You can tune in and watch through Apple Podcasts, SoundCloud, Stitcher, YouTube and additional sites listed here.

For the latest information on premarket news and movers, head over to Benzinga’s PreMarket Overview.

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Frequently Asked Questions

Which factors can affect a stock’s price?

Changes in supply and demand, driven by current events and investor sentiment, can affect change.

Who decides when stocks go up and down?

Everyone and no one. No single person dictates movement in stocks — aside from a few instances where one person or institution may choose to buy or sell a sizable percentage of the float (the total number of shares available for trading). In 99% of cases, the combined power of everyone buying or selling a stock determines its price movements.