5 Minute Overview of Today's Market
To understand the current financial market, we must look at the forces that influence market direction. The movement of money and goods around the world is dependent on four major factors.
Governments today consider it their responsibility to bolster markets by increasing spending on contracts for infrastructure, services, and goods; this reduces unemployment. At the same time, governments set interest rates for bank borrowing, which affects the ability of businesses to borrow. In short, money becomes more available or less available depending on government actions. Note that these actions are often made to counter a market trend, and markets can reverse due to manipulation. The Cato Institute offers an analysis of how governments disrupt markets here.
International Money Flow
The amount of money flowing into or out of a country fluctuates as prices for goods rise and fall. Investments that pay more can attract money from other countries; the same is true in reverse. Money can flow out of a country, weakening its economy and making its currency less attractive. Countries constantly work to get money flowing in. They may do this by creating attractive investments such as government bonds that pay high interest rates, or by charging a tariff on foreign goods coming in. When you read about "free trade" agreements, understand that this means countries agree not to charge tariffs. Such agreements allow the free market to determine international money flow.
Consumer and Investor Sentiment
Perception is reality when it comes to finances. If people believe an economy is expanding, they spend and invest more. If they are worried that it is contracting, they may hoard cash. The belief that an economy is growing or shrinking becomes a self-fulfilling prophecy. Investors constantly make educated guesses about the direction of markets. When they are wrong, losing transactions can create a momentum that changes the direction of the market. If investors are right, the trend will continue until the market becomes overvalued. People begin abandoning their positions and the trend reverses. You can read about the dangers of following the herd in this paper by 1st Global.
Supply and Demand
The quantity of goods and services is always related to the appetite buyers have. These two forces constantly seek balance. As demand rises, producers charge more. Prices begin to rise. At some point, there is over-production, causing prices to fall. Falling prices rekindle demand, so prices rise again. Understanding the relative supply and demand in any given market can create wealth for investors who get into trends early.
The Bottom Line
Supply and demand are often considered the major market force, but today's market is subject to manipulation by governments. Also, convictions about trends can cause a market to rise or fall despite the amount of supply or demand. These forces play out on an international scale, meaning that each country's market health affects whether money flows into or out of that country.
Always keep these four forces in mind: governments, international money flow, sentiment and supply and demand. The interplay of these influences keeps the marketplace in constant fluctuation. For more information, please contact Hughes Warren Inc.