Day-to-day gyrations in the stock market are probably the last place to look for enlightenment — but that doesn’t stop people from trying.
In a news-at-it-happens society starving for the latest speck of information, there’s sometimes just no better way to gauge the state of the world. The stock market seems so definitive, so easy to understand. Stocks are up, so it’s a good day. Markets fall — it’s bad. It’s an economic sports score, the value of which determines everything from 401(k) accounts to pensions and salaries to how much a company might go for in a takeover bid.
Yet the behavior of the market is often completely impenetrable. When there is a clear-cut reason for a rally, traders often overreact. And Wall Street is still skittish over echoes of the 2008 financial crisis, the continuing economic malaise, shifting tax priorities and government debt.
“The markets are kind of stalled,” said Jonathan Low, a partner and co-founder of Predictiv Consulting. “Part of this is due to new technologies, such as those which contributed to the Flash Crash [of May 6]. The market too is trying to find its way. We’re coming out of a period in which there was the destruction of trillions of dollars of value. There is a greater and greater demand for information and transparency.”
That means that, in an unsure landscape, investors want to know not just what management’s estimates of sales and profits are, but also the assumptions upon which they are based. And more elements of a business are open to scrutiny than ever before.
“The corporate barrier that used to be impenetrable is now much more permeable,” Low said. “There is a greater understanding of the importance of intangibles like design and reputation in driving value. Ten years ago would anyone [on Wall Street] have really focused on who the successor to a given designer might be? Now, personality and background and design reputation are very much a part of the calculation.”
That makes the calculation all the more complex.
“I still think that there is a place to have a thesis on a certain stock or a certain sector and make some bets based on that thesis,” said Rajiv Shah, a partner at consulting firm A.T. Kearney and head of its financial institutions group. “You can still see there are these stories around. I think they are more difficult to figure out and they are hard to live with because of the gyrations, because you never really know if you’re right or wrong. [Taking a position requires] a lot more steel and a lot more homework. The days when you could buy and hold and hope for the best have clearly gone.”
Somehow all of the buying and selling — based on mathematics, fear, greed and subjective evaluations of the consumer, management and company strategy — is expected to accurately determine the value of, say, Macy’s Inc. or Target Corp. or fashion manufacturers as a group.
Over the years, this highly chaotic process has become the standard way of establishing how much a business is worth, at least in dollar terms. It remains to be seen if markets are still doing that effectively.
Here’s WWD’s guide to what triggers stock movements, for better or worse.
Wall Street stretches far beyond the tip of Manhattan. The virtual Wall Street of the 21st century is a system of interconnected markets with trillions of dollars, millions of investors and thousands of companies.
Despite the surety of the Street’s many commentators, there’s too much static, too many fortunes on the line and too many unknowables — too many gremlins in the works — to get a handle on what’s really going on from moment to moment.
Big-money investors are using “dark pools,” or largely unregulated and anonymous exchanges, to move huge amounts of cash in and out of the market. “Options,” or contracts that give one an opportunity to buy a stock at a later date, loom large.
And more than two-thirds of all the action is controlled by computers that buy and sell in microseconds and take into account everything from breaking news to Lilliputian price fluctuations.
It’s this “robotrading” that fueled the Flash Crash, sending markets reeling for a few frightful minutes on May 6.
James Angel, an expert in the mechanics of markets and associate professor at Georgetown University’s McDonough School of Business, said the electronic network was simply overwhelmed by information during the Flash Crash. That caused some computer traders to pull the plug, upsetting the balance of supply and demand and briefly pushing the whole market to a heart-stopping 9.9 percent decline.
“I’m not too worried about the computerization of the market,” Angel said. “Every one of those computers is attached to a human who is monitoring what it is doing. It’s an ecosystem and it’s always trying to find a balance.”
There are also traders who analyze trends and movements in the financial markets and buy or sell strictly on that information.
Take the 200-day moving average of a stock, a basic technical indicator. A stock that moves above its average price over the previous 200 days is considered healthy.
But that’s not necessarily why the 200-day average is important.
“One of the reasons why that’s important is because so many people are looking at [200-day averages],” said Peter Worden, co-owner of Worden Brothers Inc., an investing software firm specializing in technical trading. “All that attention focused on one metric is almost a self-fulfilling prophecy. Psychology, that’s what really propels stocks. It’s fear that makes people sell and it’s greed that makes people buy. You’re getting these ebbs and flows of investor psychology every day. The psychology of it — if you throw everything else about it out the window, that’s what it boils down to.”
For retailers, the rubber meets the road at the cash register, and investors are paying attention. Same-store sales, which usually come out the first Thursday of each month, are the headlining act for retail stocks.
But the emphasis has changed in recent years. Investors used to look to sales at stores open at least a year — same-store or comparable-store sales — because they factored out the influence of new stores and gave a feel for the underlining business.
New stores? There aren’t so many anymore.
“Now it’s an indicator of who’s gaining share,” said Kenneth Stumphauzer, analyst at Sterne Agee, noting that a 3 percent sales gain can go a long way in these days of trimmed-down cost structures.
A lot of firms, including Wal-Mart Stores Inc., have opted out of the monthly sales ritual in an effort to get investors to take a longer-term view of their businesses. That doesn’t necessarily inoculate their shares when their peers turn in monthly results.
On Thursday, action sports retailer Zumiez Inc. posted a breakaway 21.5 percent comp sales gain for October. The performance prompted the retailer to boost profit guidance and investors to buy, sending the stock up 13.5 percent.
Whether optimistic or pessimistic, investors are a forward-looking bunch by nature. Stocks don’t so much reflect a company’s relative strength at a given moment, but how strong investors think the company will be in about six months. So when retailers or vendors post big, chunky profits, but sound notes of caution for the months ahead, it’s the forward-looking information that gets the most attention.
Such was the case when firms reported second-quarter and first-half results this summer. A short-lived consumer resurgence earlier in the year and low inventories fattened up margins and profits, but a slowdown in spending dimmed outlooks for the back half. Investors also keep a close eye on inventories, cash holdings and capital spending plans as they try to project the future.
As with most things on Wall Street, whether guidance is good or not is a matter of perspective. Earnings projections that hint at continued strength, but are still not as good as analysts expect are kindling for a sell-off.
For instance, J.C. Penney Co. Inc. reversed losses from a year earlier in the second quarter and beat estimates. But the retailer set its third-quarter earnings at 16 cents to 20 cents a share, less than the 24 cents Wall Street anticipated. The stock fell 4.7 percent.
Wall Street is one gigantic knitting circle.
Gossip, rumors and new takes on familiar stories are a daily fixture. The source of the information weighs heavily on its value. A well-argued downgrade from a respected research analyst at a big bank? Big trouble. A front-page story that a company is about to be acquired? Very interesting. Chatter at trading desks that a business could be sold to a competitor? Possibly something and possibly not.
The truth can be tough to decipher, especially since investors who have made a big bet that a stock will fall have a strong incentive to spread word of impending doom.
“It depends on where it’s reported and where it originated,” said Sterne Agee’s Stumphauzer. “If it’s in the press, that will move the stock.”
In August, shares of Saks Inc. shot up 19.7 percent to $7.90 after London’s Daily Mail said that a consortium of private equity firms might offer to buy the retailer for $1.7 billion.
That deal hasn’t materialized, but Tod’s SpA chairman Diego Della Valle has since upped his stake in the firm to 19.1 percent. His intention toward Saks might not yet be clear, but his interest has been good for the stock, which closed Friday at $12.12.
5. News of Any Kind
“Right now, investors and traders seem so focused on news events and are waiting with bated breath for the next news event,” said Worden of Worden Brothers.
Any data point provides an opportunity to buy or sell. So as soon as sales results or economic data hit the wires, computerized traders are racing to be a microsecond faster than their competitors.
The reactions of human traders are measured more in minutes, but even that time frame hardly lends itself to serious contemplation.
“The market usually goes to the extreme,” said Howard Tubin, analyst at RBC Capital Markets. “News will come out and people will shoot first and ask questions later. The market tends to overreact to headlines.”
Last month, investors got it right when they dove into J.C. Penney’s stock, pushing it up 9.1 percent on rumors that an activist was targeting the company. The next day, William Ackman and Vornado Realty Trust said they had snatched up 26 percent of the firm and would be meeting with management.
Traders have had to squint pretty hard to find any kind of good news on the jobs front. U.S. payrolls have shrunk by almost 7.5 million workers since the recession began — a horrid decline in an economy that needs to add something like 150,000 jobs each month just to keep up with population growth. (Last month, the economy added 151,000 jobs.)
The official report on payrolls comes out the first Friday each month and is pored over obsessively.
Any scant sign of a firming or weakening in employment can move markets. Each Thursday morning investors tune in to weekly claims for unemployment benefits. Any dip in first-time claims is the stuff of which rallies are made.
Many see employment as the linchpin in the recovery. When companies start hiring again, not only will more people have a steady income, those with jobs will feel more comfortable spending.
U.S. payrolls expanded by 431,000 in May, but that was 69,000 fewer new jobs than economists expected and retail stocks tanked 4 percent when the news came out in early June. That day investors were also fretting over sovereign debt troubles in Europe.
7. Ben Bernanke
There are plenty of people who have opinions that count when it comes to the economy — President Obama, Warren Buffett — but it’s Federal Reserve chairman Ben Bernanke who is most directly responsible for setting interest rate policies and, when necessary, telling the mint to fire up the presses.
In late August, Bernanke said the federal open market committee, which he heads, would “certainly use its tools as needed to maintain price stability — avoiding excessive inflation or further disinflation — and to promote the continuation of the economic recovery.”
The Dow Jones Industrial Average rose more than 160 points and regained 10,000 that day.
Just after the election last week, the Fed said it would buy $600 billion in long-term Treasury bonds to boost the economy and in short order the Dow hit high ground it hadn’t seen since Lehman Brothers filed for bankruptcy in 2008.
When the Fed chairman reaches for his toolbox, investors take notice.
Any sign that indicates the consumer should be feeling wealthier is catnip to investors. Increases in home prices, fattening pay checks and additional jobs all get the markets purring.
“We’d like to see growth in personal income,” said Paul Nolte, managing director at investment firm Dearborn Partners. “You want consumers that have discretionary income. If incomes or jobs are not growing, consumers are going to be a little less willing to spend.”
U.S. personal consumption expenditures were flat in June and retail stocks retreated 1.9 percent on the news.
9. Consumer Confidence
Consumer spending makes up about two-thirds of the U.S. economy, so the smallest whims of shoppers add up to one big issue for markets.
Sentiment dropped for the second straight month in July, which was seen as a bad omen for the back-to-school selling, and pushed retail stocks down 1.9 percent.
According to The Conference Board’s Consumer Confidence Index, Americans are feeling better than they were during the depths of the recession, but it still is mostly the belief that better days are ahead that is buoying the index.
Investors barely yawned last month when the confidence index inched up, more or less as expected, to 50.2 in October from 48.6 in September.
10. Management Changes
Who’s running the show counts. When news gets out that a lumbering company has snagged, say, respected retail fix-it man Allen Questrom as chief executive officer, investors suddenly find they can overlook a lot of ills.
Word in WWD that Questrom was a leading candidate to take over J.C. Penney in 2000 pushed the stock up more than 15 percent. And the bets paid off. The stock had risen another 150 percent by the time Questrom stepped down in 2004.
More recently, investors drove shares of Charming Shoppes Inc. down 21.6 percent on word that ceo James Fogarty had departed, leaving the company in search of a new leader.