RiverDog wrote:The financial markets are driven by consumer confidence. The whole purpose of the stock market is to provide companies with capital for them to use to do whatever they need to increase sales or make their products better or cheaper, ie modernize their factories, hire sales people, etc. It's not unlike giving a football player a big new contract. You're not paying him for what he did for you in the past or even how he's playing currently, you're giving him that contract in anticipation of what he can do for you in the future.
This is a partial purpose. Another purpose is for investors to be able to buy and sell companies. Every exchange of stock does not go to the company for capital to improve the business. Once the initial public offering is completed, the company has received its capital. The stock market then becomes a vehicle for investors to exchange shares of ownership in companies, hopefully for profit if the company is well run.
You should be wary of companies that go too often to the stock market as gaining capital through stock sales dilutes the ownership shares of the current owners. It's something you should watch carefully. If the company can't sustain and grow the company through profit reinvestment, that's a big warning sign. There are other ways for a company to capitalize growth than stock issuance.
Fund managers look at certain indicators to predict how a business will do in the future. Orders for goods or services is a leading indicator. If a company receives an uptick in orders, then you know that eventually they're going to receive proceeds from the sales. Employment is a lagging indicator. Employers don't start hiring until business has picked up and inventories start to shrink. If you start investing because you see that the unemployment figures are low, you might be too late. The business might have already slowed down but employers are reluctant to start laying off their workers until their warehouses are full.
You're right, the markets will take a hit if Trump is impeached or the Mueller investigation bears significant fruit. Markets do not like uncertainty as fund managers start hedging their bets and pull their money out because they are unsure of what the future might hold should there be a significant change in the future.
But these types of hits that are driven by scandals or random news events are relatively short lived. Once fund managers figure out the new paradigm or have confidence that the old one is going to be around for awhile, they'll either figure out where the next opportunity is or breathe a sigh of relief and toss their money back to where it was in the first place.
Consumer confidence is loosely associated with the stock market as it does show how willing someone is to spend money on goods and services in the economy. But consumers as a whole don't drive the daily markets. Investor confidence is an element of the stock market that has a dramatic effect. Risk on-risk off tolerance of investors drives daily and short-term market undulations. That investor confidence will suffer greatly if an impeachment and possible change in the White House occurs, especially one that causes the Republican Tax agenda to be defeated. The market is partially pricing in a long-term, beneficial change to tax rates for business. If that tax reform doesn't pass and the president is impeached, you will see a major drop in the markets, probably a few thousand points or more. The length of that drop could be short-term, meaning lasting less than a year or longer term meaning a few years depending on the stock and its value at the time of the drop.
Long-term fundamentals will prevail, but if the valuation is already too high for the fundamentals to support then that could extend the loss and the drop for a long time. If you invest at a peak and then a large drop comes, it could take years to recover lost capital. The tech bust was a prime example of what kind of damage investing in a bubble can do to your capital. Investing in Microsoft at a 100 a share way back in 2000 before the tech crash would have meant 15 years nursing a loss to no gain in that investment. It hit it's peak of 116, split to 58, then collapsed, and didn't hit 50 again until 2015. That means you wouldn't have seen a return on investment if you invested during that period for over 15 years. That is why bubble investing is risky and dangerous. You have to understand valuations, associated fundamentals, debt structures, quality of assets, momentum, and the macroeconomic factors driving the stock market.
If you take this loss, that's when you use those tax benefits available to all of us to write off an investment loss over the course of years. An individual last time I took a loss could write down up to $3000 per year of capital losses over the course of three years for a total of $9000 dollars on a bad investment. It may have increased at this point, but I haven't taken a loss in the market that large since the tech bust. I'm very careful about bubble investing now. I spend far more time analyzing fundamentals, macroeconomic factors, momentum (also known as technical trading), and looking for opportunities to buy in at a good price.
At this point we have a market driven by a lot of enthusiasm for macroeconomic factors associated with a Republican led government. But we also don't have good alternatives. Cheap money certainly doesn't help. Stock investment is driven by returns. If buying long-term bonds is only giving you a 2% return and investing in the stock market is giving you a 3 to 5% return, you're certainly going to invest in stocks. You don't want to sit on cash too long because inflation eats the value of your cash. At the moment long-term bonds barely keep up with inflation.
As far as discussing invest, I could do it for hours. One of the best skills you can learn to make money. But it is a skill and you have to understand what you're doing or you might get taken to the showers doing it on your own.