How to Know When the Stock Market Will Likely Rise or Fall

I am going to answer this important question in two parts. The first part is going to relate to the short-term rise and fall of the stock market over a week to a month and in the second part I am going to discuss the longer-term rise and fall which will be over a year or more.

The short term.

Every week you will see and hear about the stock market rising and sometimes falling. I say sometimes falling because over time the stock market will rise as it has done for the past 100 years or more. For example, since 2008 to 2020 the S&P 500 in the United States rose 380%. However, the stock market as a whole week to week and month to month will have positive days and negative days and there are very specific reasons why stock markets rise and fall in the short term.

If you are a new trader to the stock market and your strategy is to trade stocks very short term and attempt to go long and short in my experience it is unlikely you will have much success. Retail traders when trying to time the stock market’s direction over a short period of time do not have the experience or knowledge of how to understand how investment banks and hedge funds will react to the following events which drive stock values in the very short term.

  • Economic data announcements.
  • Central Bank policy statements.
  • Company earnings season.
  • Geopolitical tensions.
  • Political announcements and decisions.
  • Unforeseen natural disasters.

The 5 listed events above are generally what drive the overall stock markets performance on a daily and weekly basis and unless you have the knowledge of how stock markets work fundamentally and have worked alongside investment bank and hedge fund traders I caution you on taking a short term approach to making money trading stocks.

Short term stock market traders will generally be using technical analysis to make their decisions to buy and sell and I strongly urge you not to use this approach unless you have extensive training from an organisation such as Trading Mastery on how big money investors are likely to react to the events listed above.

In general terms the short-term direction of the stock market over a weekly basis can be determined by whether or not the current theme in the market (one of the listed events above) is likely to have a positive or negative impact on the economy and company earnings.

For example, as I write this article in early 2020 China is struggling to deal with the outbreak of the Coronavirus which is spreading rapidly within its own country and also contagion is happening throughout the world. I would class this event as an unforeseen natural health disaster which while unusual is a negative for the global economy and some company earnings. Less people will travel to China, companies buying from China may decide to buy elsewhere and international travel and business may be negatively impacting if more cases of the virus spread throughout the world. Investors in this case are selling stocks of international travel companies such as Carnival, airline, hotels and any companies with a large exposure to China, particularly the food industry. The companies impacted are seeing their share prices fall which is overall dragging down the share markets value.

Another example of a short-term price move in the stock market may relate to a group of companies in the Dow Jones (top 30 stocks in the USA0 issuing better than expected company earnings. Each quarter companies listed on the stock market must report their revenues and earnings and if over a period of a week some of the big companies such as Apple, Boeing, Alphabet, Exxon and Goldman Sachs report better than expected company earnings investors are going to see this as good news story and the demand for those stocks will rise and thus will drag up the overall value of the stock market.

Keep it simple. In the short term if the news is good the stock market will likely rise and if the news is bad the stock market will generally fall.   

The long term.

The long-term stock market trend over 1 – 10 years is generally determined by the level of interest rates that are set by Central Banks such as the US Federal Reserve, Bank of England, Reserve Bank of Australia and European Central Bank as examples.

Buying stocks is generally considered a riskier investment than putting your money in the bank or buying bonds which in both cases is called fixed income investing because the interest you earn is usually fixed and varies rarely. However, if the return on investment from fixed income investments is lower than what stock market returns are offering then the obvious reaction is for big money and small money investors to buy stocks instead of investing their money in fixed income. Many blue-chip stocks also pay dividends which can be as high as 4% per year.

A good example of investors preferring to buy stocks instead of investing cash in the bank or buying bonds has been between 2008 and 2020 when interest rates set by most of the world’s largest Central Banks has been close to 0% or even negative in some countries. Leaving you money in the bank would have resulted in inflation (the cost of living) being higher than your return therefore your investment would be going backwards. Leaving your money in fixed income over this period has been a lousy investment compared to buying blue chip companies on the share market.

A simple rule of thumb to follow is this.

  • When interest rates are being lowered by Central Banks this is usually positive for stock markets as money will be moved from fixed income, which is getting less and diverted into stocks which has the potential to earn more.
  • When interest rates are being lifted by Central Banks money will come out of the stock market and back into fixed income which will be offering a higher return than it previously was. Given fixed income returns are seen as a safer investment than stocks, as interest rates or the talk of interest rates rises the overall stock markets value will likely fall.

It is important to note that prosperous economic times does not necessarily translate into stock markets going higher. Central Banks have a balancing act they must perform to ensure they don’t allow stock markets to overheat by keeping interest rates too low for too long.

Back in December 2018 the US Federal Reserve said in its monthly statement that it would likely raise interest rates 3 times in 2019. This statement was immediately seen by stock markets investors as a major sell signal and the US stock market fell by more than 10% in 6 weeks. Why? Because investors saw they were potentially going to earn a higher and secure investment return by putting their money in fixed income. Plus, they wanted to shift their money quickly out of stocks before the value of the stocks they held fell.

In summary.

In the short-term stock markets rise and fall based on positive and negative news that is the theme in the market this week and this month.

In the long-term stock markets rise and fall based on how high or lower interest rates are at Central Banks and what monetary policy programs are set by the Central Banks.