Very often, I’ve found, politics will play havoc with the value of the stock market. Rumors of war, terrorism, election victors, etc. will affect the price of a share of stock. While not every stock will go down with bad news and not every stock will go up with good news; I have found that, in general, this pattern follows.
However, what is it about political news that affects the price of an individual stock. Take Coca-Cola (KO) for a second. Coke’s price should be based on its market share, financial information, sales outlook and probably a few other (internal) factors that I failed to mention.
However, I don’t see how political news would affect Coke’s price. Do people drink less Coke in the U.S. because there’s a war on in Iraq? Does it cost more to make Coke if Gore wins the election than if Bush wins?
In other words, how do outside factors that, at best, minimally impact Coca-Cola affect its stock price. The same could be said for most other stocks as well. Of course there are some stocks (Boeing, for example) that are directly tied to politics, but, on the whole, I don’t see why the market reacts to political news so much.
Zev Steinhardt
First of all, be skeptical when you hear analysts correlating market movements with political news. Often nobody knows why either individual stocks or the market move in a particular direction, but it sounds better to say “Stocks closed higher today on rumors that North Korea might behave” than to say “Stocks closed higher today and no one knows why”. Be especially skeptical when someone tries to correlate markets to domestic politics–if a commentator says, “Markets are up in the last week because Bush has gone up in the polls”, it’s pretty obvious that he’s flogging a political agenda.
Of course, there is some correlation between world news and business prospects. Coke does a lot of business internationally, so if part of the world is torn by war it could effect their profits. And, to take an extreme example, almost every American business was hurt by September 11, because consumer confidence took such a huge hit (not so bad for a cheap consumer product like Coke, but disaster for big-ticket items). So big news does effect markets, but not nearly as often or as predictably as commentators would have you believe.
Yes, jklann, but if the rumors affect the right stock (notably the 30 in the DJIA), they can have an effect on the market as a whole. And when analysts see big movements, they start asking insitutional investors why and are given a consensus.
Not that it’s true every day, but many times there are reasons why a stock drops, and it could be political.
Zev – the news could affect Coke peripherally. For instance, yes the companies fundamentals may not change (as if fundamentals had that much to do with why people buy and sell – see the Internet boom of the 90s), but people can get nervous. So they pull their money out of the stock market and put it in a sock at home, just to be safe (if they’re rich, then into a Swiss bank account). To do this, they sell their Coke shares. Coke drops.
Also, since the market is fundamentally a risk, when times look bad people remove funds from it to put it into something safer. Thus, prices drop.