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Planning

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20th
Sep
2023

What moves the market?

The stock market is, at its heart, a gigantic weighing machine with people offering to buy and sell securities on a second-by-second basis. The market reacts with each new participant coming to buy and sell. For example, if people are offering to sell a stock for £20 and then suddenly someone offers to sell for £15, the market reacts immediately with buyers and sellers adjusting to this new information and sale prices.

Whilst the stock market is an incredibly efficient weighing machine at almost all times, providing a fair price (fair being a crucial word, fair does not necessarily mean accurate). Why it moved in a certain way is incredibly difficult information to extract. Most of the time, we can rationalise and devise sensible reasons why a security rose or fell. However, it is very hard to know for sure. The sheer number of variables involved means it is nigh on impossible to understand how one particular factor has affixed an individual stock. This means when events reoccur, it is not always possible to predict the effects. For example, one day, an interest rate rise may harm a security, but a subsequent rise appears to help it. At its heart, this is partly why predicting the movements of individual securities or even the market as a whole is consistently proven to be a fool’s errand. Approximately 90% of funds that take an approach based on predicting movements underperform the average. Where the markets are concerned, the scientific catchphrase, correlation does not always equal causation, is never more true. A wonderful example of this is something that occurred during the Euro 2020 football championship.

During a pre-match press conference, Cristiano Ronaldo very publicly moves two bottles of Coca-Cola from the table and requests water. To many, it appeared the market reaction was seismic, with $4 Billion being wiped from Coca-Cola’s valuation. The conclusion was obvious: Coca-Cola had received some very public negative marketing from a global sports star, and the market was seemingly immediately predicting a fall in revenue. The solution, again seemingly obvious, big brands ignore sports stars and other influencers at their peril, and any brand not making concerted efforts to engage with this type of advertising only had themselves to blame if they suffered similar consequences. The problem with this story, is that it is only a story. Whilst it is very hard to tease out the variables involved in price fluctuations, this is one of the few examples where we can be certain that an event did not influence a security’s price. The reason, the timing is off. Whilst this story rippled around the globe, being unquestioned initially by most media sources, it was later realised that something else had occurred.

Let’s look at the timeline1

  • Friday 11th June – Coca-Cola closes the trading day with a valuation of $242 Billion
  • Monday 14th June – Coca-Cola opens with a lower valuation at 09:30
  • Monday 14th June 09:40 – Coca-Cola’s valuation has dipped to $238 Billion (the $4 Billion loss)
  • Monday 14th June 09:43 – Ronaldo moves the bottles and asks for water

So, whilst Coca-Cola appeared to have suffered a significant drop due to the movement of some bottles, it actually had fallen before the bottles were moved. The conclusion, there were other factors involved in this valuation change. A final nail in the coffin for the argument that some bottles being moved wiped billions off the market value is that from 09:43 to the close of the market that day, Coca-Cola’s valuation had already recovered $1.3 Billion.

Events that seemingly influence markets are not always straightforward, and using previous individual events to analyse and predict reactions to events that may happen in the future is not something we should attempt to do.

1Forbes – A Post-Truth World: Why Ronaldo Did Not Move Coca-Cola Share Price

Patrick Christie
Financial Planner – WealthFlow
patrick.christie@wealthflow.com

 

This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated. Errors and omissions excepted.

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© 2024 WealthFlow Group Limited
All Rights Reserved | Privacy | Cookies Policy

Head Office & Consulting Rooms: 10 Charlotte Square, Edinburgh EH2 4DR.

Mail correspondence to our Central Scotland Admin Hub: WealthFlow Group Limited, PO Box 14947, Grangemouth FK3 3AU.

WealthFlow Group Ltd is authorised and regulated by the Financial Conduct Authority.

The guidance/advice contained in this website is subject to the UK regulatory regime and is therefore restricted to consumers based in the UK.

For your protection, unresolved complaints can be referred to the Financial Ombudsman Service.

To contact the Financial Ombudsman Service, please visit www.financial-ombudsman.org.uk.

WealthFlow Group Ltd. Registered in Scotland No SC635011. Registered Office: 10 Charlotte Square, Edinburgh EH2 4DR.