Now in the time, we have together today I'd like to share with you my thoughts on a subject that both interests and confuses a great many people. The stock market.
Now understanding the stock market and how it works is important, even for those individuals who are not active investors. Because a well-functioning stock market is an essential element in the forming and funding of new businesses, the efficient allocation of capital, the creation of employment opportunities, and ultimately, the long-term accumulation of wealth for a society. But before we go into any detail about the stock market, let's first clarify a few points and define a few concepts to make our discussion more meaningful and more informative.
First of all, there is no single stock market, but many different markets around the world with disparate rules, regulations, features, and functions. What they each have in common, however, is that they allow businesses to gain access to private capital financing through public markets.
Secondly, instead of thinking in terms of a stock market, it's more appropriate to understand that what we are talking about here is a market of stocks. While this is admittedly something of a cliché, it also has the advantage of being an appropriate one. Because while many factors drive the pricing of financial assets collectively, other features will ultimately lead to distinctly different performance within each market.
Lastly, there was a great deal of jargon in market-speak used by financial market participants that can make things even more confusing when trying to understand the stock market, so I'm going to try to avoid much of the jargon here. But when do you encounter an unfamiliar term, phrase, or acronym, don't be shy about asking what it means?
So let's get started with what we need to know to better understand markets.
First of all, there are a great many variables that ultimately influence directional moves and the pricing performance of markets overall. So many in fact that it's almost impossible to list here. However, there are four broad categories that many of these variables and catalysts fall into that I would like to briefly highlight for you.
The first is macroeconomic editions.
It's often said that the stock market appears divorced from the realities of the real economy but nothing could be further from the truth. In fact employment growth, business investment spending, and inflation all have a critical and primary impact on market performance.
The second is policy choices and decisions.
In the aftermath of the global financial crisis. It became increasingly obvious that policymakers can at times play an essential and even dominant role in market outcomes. These policy choices include monetary policy, what actions central banks are taking, and fiscal policy, what our elected are officials doing with your money?
The third is valuation.
Knowing how fast an economy is growing and which policy choices are being made are important market determinates. But understanding how much of that growth and which of those policy moves have already been discounted to market pricing is perhaps even more important. It is therefore essential to also have developed the framework and tools that can help value equity markets.
Lastly, there are also technical factors that must be considered as well.
Too often fundamentals, policy choices, and even valuation can be trumped in the very short term by technical forces. These might include flows in and out of mutual funds, positioning within speculative accounts, and even changes in rules, and regulations. Just to wrap things up, let me go back for a moment to a concept I touched on briefly at the beginning of our discussion.
That is a market of stocks.
Because while all the factors I've already discussed will influence overall markets, other variables will lead to differences in performance for individual companies.
Once again, these are too many to list, but fortunately, we can also place these into three broad categories. Think of them as who, what, and how.
First, who are the managers and stewards of the business? And do they have the ability, willingness, and skill to make the decisions required for the company to thrive?
Second, what is their competitive advantage or the differentiated product that sets them apart from their competitors?
Third, how will they shepherd the resources of the firm to ensure that their company continues to innovate, grow, and prosper in a competitive business environment?
Well, It's all scratch the surface of what is required to value equity markets.