5 Factors That Drive Stock Prices
Central banks, market sentiment, and valuation all play a role
Over the next few years, emerging markets countries like
On a day-to-day basis, it's impossible to predict what will happen in stock markets worldwide. One week, the market is up on better-than-expected economic indicators, and the next it's down because of a new development in the sovereign debt crisis in
Research over the years has proven that higher GDP growth doesn't necessarily translate into higher stock returns in a particular country. The correlation between the two is actually negative. Take
Investors should pay attention to analysts' expectations for higher or lower economic growth in a given country. "You want [to invest in] markets where you find GDP growth is accelerating," says
[See 6 Risks Every Investor Faces.]
In the long term, valuation plays an important role in driving stock prices in a given country, says
Despite what's going on in the economy or with a particular company's fundamentals, investors will sometimes trade on momentum. "Often investor psychology can pile on and drive a stock price higher and higher, well above fair value, and that can happen for an extended period until finally there is a correction," says
Central bank activity.
Generally, you want to invest in a country in which the central bank is lowering interest rates. While interest rates remain at virtually zero in
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