Most investors know that over a long period of time, the stocks that they own will either increase or decrease in value based on the success or failure of the underlying business. Most investors also know that in the short term, there can be wild gyrations in stock prices that can lead to purchasing a stock above or below its fair value.
The combination of a predictable long-term outlook for stocks and not being able to time short-term gyrations makes being a long-term investor much easier than a short-term investor. But it also raises the question – what causes all of the short-term moves in the first place? Why is it that in the next year or two, Apple’s stock performance depends on how they do as a company, but in the next month or two, Apple’s stock may rise or fall with almost no news at all?
As an investor, it is important to understand the reasoning behind these short-term movements. After all, if you understand what is driving short-term movements while keeping a focus on the longer-term fundamentals, you can set yourself up to buy great companies at bargain prices. Below are a few key components to understanding short-term market timing.
Geopolitical or Macroeconomic News
Outside of earnings season, there are frequently times when there is not much news coming out about a specific company or sector, so investors tend to look for geopolitical or macroeconomic news to get a sense of events that may change the path of an industry. How much the market moves from geopolitical or macroeconomic news depends on the severity of the event and how it changes expectations for the future.
While most economic news by itself is uneventful, there are occasionally times when big events will hit the wires that will move the entire stock market. For example, think about how little of an impact a single Jobless Claims report will have on the market versus an announcement that the US will be putting tariffs on Chinese goods. The Jobless Claims impact is usually minimal, but the tariff announcement moved the entire stock market and even commodities and bonds.
Earnings Reports
One of the most predictable market movements occurs during or around the release of earnings reports. Earnings reports are quarterly reports issued by all publicly traded companies that give an update on their financial well-being, so it is easy to see why these might cause a stock price to move. In practice, it is not always about whether the company released earnings that went well, though. A lot of the time, stock price movements are about the expectations of the earnings.
For example, if Apple grew its Earnings Per Share (EPS) by $1.00 in one quarter, you may think it is a great report, but what if analysts and Wall Street expected them to grow their EPS by $2.00? In this example, you would likely see the stock price fall because it showed growth, but not quite what the analysts expected it to show.
When it comes to market-moving earnings reports, there are generally two things to remember:
- In the short run, earnings reports will generate volatility – this is good for short-term traders.
- In the long run, one single earnings report is likely insignificant to the true value of the company.
Interest Rates & Liquidity
One of the biggest factors in short-term stock market movements is interest rates and overall market liquidity. The Federal Reserve and other central banks have a significant influence on stock prices through their monetary policy decisions. When interest rates are low, borrowing becomes cheaper, fueling business expansion and making stocks more attractive relative to bonds. Conversely, when interest rates rise, borrowing becomes more expensive, corporate profits can shrink, and investors may rotate out of stocks into fixed-income assets.
Market liquidity—how easily assets can be bought or sold without affecting their price—also plays a key role. During periods of high liquidity, stocks tend to rise as investors have more cash to deploy. In contrast, liquidity crunches, such as those seen during financial crises, can lead to rapid sell-offs.
Crowd Investing Mentality
When there is little news or earnings to impact the markets but prices are still rising, it may be due to investors buying a stock or index for fear of missing the rally that is occurring. In doing this, investors tend to increase the amount of risk they are taking on by jumping into a market that may, or may not, have a fundamental reason for moving. In the end, this can create a scenario where stocks “melt-up” or reach levels that are much higher than any fundamental would justify.
Likewise, when stock prices are falling, no one wants to stick their neck out and be the first one to buy for fear that it may not actually be the bottom, so investors tend to stay on the sidelines. This occurs even as prices reach levels that investors would have been happy buying at a short time before. In the end, this can create scenarios where stocks “melt-down” and fall to rock-bottom prices that are way lower than the fundamentals would justify.
Both of these scenarios are examples of herd mentality and show that not all market moves are tied to some news or fundamental event. To exploit these events, you need to have a long enough time horizon and the intuition to notice when stocks may be overvalued or undervalued and act quickly to take positions.
Real-World Examples of Market Reactions
- 2008 Financial Crisis – The collapse of Lehman Brothers and the subsequent credit crunch led to a liquidity crisis, driving stock prices down rapidly. Investor panic and forced deleveraging created a sharp downturn.
- 2020 COVID-19 Pandemic – In March 2020, stocks plummeted as uncertainty about global economic stability spiked. However, an unprecedented wave of stimulus measures and low interest rates fueled a rapid rebound.
- Federal Reserve Rate Hikes (2022) – As inflation soared, the Fed raised interest rates aggressively. The stock market saw short-term volatility with sharp sell-offs as investors adjusted their expectations for corporate profits and borrowing costs.
Managing the Fluctuations
The best way to manage the everyday fluctuations in the market is to just put your head down, don’t get spooked by the daily dose of bearish news, and invest for the long term. Owning an individual stock means that you are part owner of that company, and the intrinsic value of a company doesn’t move very much in a short period of time, so forget about the day-to-day news and focus on the longer term.
Think of owning a stock like owning a home. There will be some short-term fluctuations in value based on micro real estate trends, but over a long period of time, you expect your home to appreciate in value. The same is true with well-run companies. There are always short-term fluctuations, but over a long period of time, the company will grow, and so will its stock price.
To be fair, that doesn’t mean that all short-term movements in stocks are unwarranted, but it is usually easy to spot those that are. For example, if it was announced that the city was planning to build a jail right next to your house, that would materially impact the long-term value of that property. The same is true for stocks. Major macroeconomic changes or structural shifts in an industry can have real long-term effects, but short-term noise should not dictate investment decisions.
