Personal Wealth Management / Market Analysis
Fisher Investments Explains How Stock Prices Are Determined
This video from Fisher Investments examines how stocks are fundamentally forward looking. This means current stock prices reflect investors’ expectations of future corporate earnings and growth.
Millions of investors across the globe attempt to calculate the current fair value of stocks based on projections of companies’ future earnings. The stock market acts as an information-processing machine, reflecting new information, ideas and opinions in stock prices almost instantly. Because investors’ expectations are priced into stocks, markets tend to move on the difference between those expectations and reality.
Fisher Investments believes stocks reflect probable outcomes between 3 and 30 months into the future, depending on market conditions. In bull markets, stocks tend to focus on the longer end of that range to capitalize on long-term growth. In bear markets, however, investors often shrink their outlook to the shorter end of that range as they weigh potential causes and assess the extent of the damage.
Title screen appears, “Fisher Investments”
Screen changes to an animated style background with 3 business professionals standing on the right.
A banner appears with the question “what is investing?”
Female voice: Every day, investors put their money to work in the stock market. But what is investing?
Screen changes to a tree boxes, each indicating Stocks, Bonds and securities. Seconds later it switches back to a banner with the following sentence “Future long term Growth Potential” with a couple buildings drawn in the background with business professions on the right hand side.
Female voice: Investing is buying something today, like a stock or other security, with the expectation that it will be worth more in the future. In this way, investors aren't just paying for what they think a company's stock is worth today, but what they believe it might be worth in the future.
Screen switches to a man with a binocular “watching stock prices today” as a literal meaning and a hyperbolic meaning. Seconds later the screen switches to a businessman with a lot of money-making tools drawn next to him.
After that a banner appears with the title “Potential Higher Earnings in the future”
Female voice: That means that stock prices today reflect investors future expectations. For example, one investor may interpret a company's recent data as the potential fora much higher future profitability. Based on that expectation, the investor may project the potential higher earnings in the future and estimate a reasonable price for the company's stock that discounts those higher future earnings to the present.
On the screen a map of the world appears, on the map many analysis data-grids and profiles appear above many locations.
Seconds later the screen changes to a title “Stock market” with a couple of business professionals to each side of the title left and right.
Female voice: And that's the forecast upon which they invest. The world is full of investors, both institutions and individuals, each one researching and analysing data about the future prospects of companies and the economy, then investing based upon what they learn and what they believe that means. Around the world, there are millions of investors buying and selling based on their future expectations. Taken together, all these investors make up what we call the stock market. With contributions from all those investors.
The screen is showing a factory roller floor with bunch of boxes on the way to a mechanical arm.
2 banners with a buy and sell written in it appears, in the middle an index is shown.
Female voice: The stock market acts like a huge information processing machine. Any new information, ideas and opinions that shape future expectations are almost instantaneously reflected in stock prices through the process of buying and selling in this way, the stock market tends to be one of the most reliable, forward looking economic indicators.
On screen an animated road is shown with a 3-month iron banner on the left. And a faraway 30-month iron banner on the road.
Female voice: Let's look at this from the market's perspective. We believe markets look into the future between three months and 30 months, approximately. Why those boundaries.
On the screen a blue background appears with a bunch of businessmen scattered around for show.
Seconds later, a green background appears with 3 boxes indicating a three-days period. Seconds later the boxes number extend to a 30 box, with a lots of interrogation marks at the end of the line.
Female voice: Remember, the market is full of investors pricing in their future expectations today. There's often too much noise in the short term to make any meaningful forecast shorter than three months. And the further out an investor looks; all the possibilities and unknowns begin to multiply and compound upon themselves. Until there are so many variables and possibilities, it's virtually a guessing game.
On screen and for a second time, an animated road is shown with a 3-month iron banner on the left. And a faraway 30-month iron banner on the road. Seconds later a bear appears in a white box with a lot of police yellow tapes with the word caution on it on each side of the bear.
Female voice: During bull markets, stocks tend to focus towards the far end of the three- and 30-month range. But when something huge and unexpected happens, the market's focus shifts closer to three months as investors process the potential impacts. Once investors digest the new information and it's reflected in stock prices, the market shifts its focus back toward the far end of the range.
A grey background appears with 30 boxes indicating a month period.
Seconds later 3 pieces of paper appears, these papers are from newspapers headlines for COVID break-out period.
After that, a big piece of newspaper appears with the title “China Locks down Wuhan Amid Covid Crisis”
Female voice: Here's an example. Throughout 2019 and into early 2020, the market seemed more focused on the future, towards 30 months out. The first reported COVID-19 case arose in December 2019.In January 2020, the virus's pandemic potential drew broader media attention, and China instituted the first lockdowns. But stocks were still rising. But then, in late February 2020, local and national governments around the world began considering business lockdowns to combat the spread of COVID-19. The stock market then drastically shifted focus to the near term as investors anticipated widespread containment efforts and assessed the impacts to businesses and consumers.
On the screen a chart appears, this chart is showing the S&P 500 total return index decline in Covid break-out.
Alone the index many newspaper titles appear. Showing Covid lockdowns easing.
Female voice: The result the market plunged over 30% in 33 days, creating one of the swiftest bear markets in history. Then, by late March, markets began to shift focus back toward the longer end of the range as investors anticipated lockdowns easing and the economy eventually recovering. As 2020 proved, the market doesn't need glowingly optimistic developments to move higher.
On the screen a yin-yan circle appears with both black and white colour on each of it sides.
But this time it indicates expectation vs. Reality.
Seconds later an animated background appears, with the year 2020 drawn alone with 3 business professionals of the right side and newspaper titles floating around indicating Economic Recovery.
Female voice: Because the market moves on the difference between expectations and reality. Stocks can still advance, even if investors expect the future to be only slightly less worse than feared. As 2020 progressed, gradual re openings and rebounding economic activity such as retail sales and industrial production confirmed what the stock market recovery had indicated since March 23th.
On screen and for a third time, an animated road is shown with a 3-month iron banner on the left. And a faraway 30-month iron banner on the road. Seconds later many warning panels appears indicating direction and warnings to the investor.
Female voice: Understanding the market's forward-looking focus is critical. It can help bring clarity to investment decision making, helping investors separate hype from the true fundamental factors that influence markets.
The female finished talking, and a white screen appears with a title “Fisher investment” underneath it is the red YouTube subscribe Button.
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A Series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of fisher investment or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.
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