WHAT MAKES THE STOCK MARKET MOVE?

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

The stock market's movements are predicted by pundits, examined by analysts, recounted by reporters and scrutinized by society. But how many people really know why the stock market goes up and down?

The simple reason behind the stock market's movements is the basic law of supply and demand. When more people want to buy stocks than there are who want to sell, the price of stock goes up. When more people want to sell stocks than want to buy, the price of stock goes down.

The U.S. stock markets are auction markets. This means the price of a stock at any given time is determined by how much someone will pay to buy it and how much a stockholder will accept to sell it.

Therefore, supply and demand cause the stock market to move. But what causes supply and demand to go up and down? Understanding this can help you put daily stock market activity into perspective and focus more on the long term.

Many complex factors affect supply and demand for stocks, one of which is the U.S. economy. A strong economy is generally characterized by low unemployment, low inflation and low interest rates. Low unemployment means more money coming into U.S. households, and low inflation means more money to spend. This stimulates individuals to invest, increasing the demand for stocks. In addition, low interest rates make fixed-income investments less attractive than common stocks, further increasing demand.

A weak economy has the opposite effect. More investors want to sell. Supply increases, demand decreases and stocks decline in value.

Global markets are another factor affecting supply and demand. When a foreign economy weakens, it leads to decreasing demand for U.S. goods. Lower foreign demand could lead to lower foreign sales and profits for U.S. companies -- and lower profits make a company less desirable to investors.

Much market activity is knee-jerk reaction. For example, when Hong Kong's stock market plunged in October 1997, the Dow Jones industrial average responded with a 7.2 percent drop. Many investors decided to sell out of fear that Hong Kong's problems would negatively affect U.S. companies.

However, a 1998 study by the investment research firm Ibbotson Associates Inc. showed that a long-term outlook evens out volatility. The study compared the range between the highest and lowest average annual returns of the Standard & Poor's 500 Index for rolling one-, five-, 10- and 15-year periods from 1926 through 1997. The one-year periods were by far the most volatile, with average annual returns ranging from +54 percent to -43.3 percent. The five- and 10-year rolling periods had dramatically fewer negative returns, and the 15-year holding periods showed no negative returns.

As long as there's a stock market, there will be pundits, analysts and observers -- and there also will be ups and downs. There's no guarantee about which direction the stock market will move tomorrow, but one thing's for sure: The best way to overcome stock market fluctuation is to stay in the long term.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.