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Should You Trade Stocks in the Morning?

Why Stock Market is Down

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The stock market is often subject to volatility, often resulting in price swings up and down to varying degrees. Many factors can contribute to this volatility, and depending on the time of day, some of these factors are more likely to occur.

But why does the stock market go down specifically in the morning?

The stock market goes down in the morning due to news or events occurring outside trading hours. The impact of these after-hours events also encourages more day traders and individual investors to trade at market opening, increasing volume and potential volatility.

This article will discuss some of the common events or factors that can occur outside of trading hours that can cause negative price reactions in individual stocks or the general market at the opening bell. 

These triggers for stock market price adjustments can be helpful to watch for, as they can present possible investment possibilities.

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Factors Impacting Overall Market or Sectors

The stock market is very fickle and reacts to every small or large thing that happens in the world, whether it is financially related or not.

Let’s take a look at some of the factors that impact the overall market.

Political News and Government Policies

Political news is a common trigger for stock market reaction. 

New government policies affecting areas such as trade or taxation can occur at any hour and can have a direct correlation with off-hours activity that results in a stock market dip in the morning. 

Additionally, the announcement of political candidates or election results both domestically and internationally can cause a stock market reaction based on the possible impact of a candidate’s future policies.

Employment Reports

Employment rates are one of the most important metrics in measuring economic health. 

Okun’s law attempts to correlate unemployment to economic growth by asserting that a country’s gross domestic product (GDP) must increase by 4% to achieve a 1% reduction in the unemployment rate.

If unemployment rates rise above the natural unemployment rate, this relationship then causes possible GDP growth stagnation.

The U.S. Bureau of Labor Statistics releases an Employment Situation and Nonfarm Payroll report every month, typically on the third Friday after the week, including the 12th of the month. 

This report is generally released in the morning, just prior to the stock market opening. If a monthly employment report reveals higher than expected or increased jobless rates, it is likely that the stock market will react negatively in the morning when trading begins.

Inflation Reports

Price stability occurs when there is little or no inflation, or deflation, over time, meaning that the currency’s purchasing power remains similar or flat. 

Inflation can cause the stock market to fall because increasing inflation rates are linked to decreasing purchasing power of consumers. In turn, businesses may experience reduced revenues due to the reduced free cash consumers have available. 

The Federal Reserve is responsible for promoting price stability and economic growth via monetary policy.

The Consumer Price Index Summary is one of the most closely watched reports related to inflation, and the market watches this carefully to attempt to gain insight on potential future policies of the Federal Reserve. 

Producer price reports and oil prices are also monitored for potential links to inflation. If these monthly reports reveal higher than expected or possibly increasing inflation rates, the stock market may go down in response.

Consumer/Retail Reports

Consumer activity is vital to economic success, as consumers are responsible for almost 70% of the economic activity in the United States. Due to this significant economic reliance on individual spending habits, consumer purchasing trends are another closely watched metric for the stock market. 

The Consumer Confidence Index is a leading report utilized for this and is published on the last Tuesday of each month, which may cause a morning stock market adjustment on that day. 

A retail spending report is also published by the U.S. Census Bureau and details actual spending activities as a lagging indicator of consumer activity.

Housing Reports

Housing is an economic indicator that is more difficult to measure on a widespread basis, as patterns can be very localized. However, the housing market is another critical indication of consumer willingness to purchase a new home or make other large purchases. 

There are a variety of reports monitoring housing metrics due to the regionalized nature of the housing market, but a popular report for this is the S&P/Case-Shiller Home Price Index, which tracks the change in home prices within 20 major American cities. 

Natural Disasters and Human Health Measures

The Covid-19 pandemic has presented an example of a significant adverse reaction to a natural disaster by the stock market. 

In March 2020, ongoing worldwide virus case increases and lockdowns contributed to a negative stock market reaction that several trading indexes were periodically halted to curb panic selling. 

Natural disasters such as earthquakes, hurricanes, tsunamis, and tornadoes, among others, can cause catastrophic damage to communities and businesses. 

The other impact that the general public may be less aware of is the potential damage such an event can cause to the supply chain.  Suppose an area supplies a significant portion of the materials for industry, such as Taiwan or Japan with the semiconductor industry. 

A natural disaster event can cause massive impacts to revenues for companies both directly or indirectly linked. In turn, the stock market can react negatively in anticipation of reduced revenue potential from companies in such industries.

Factors Impacting Individual Stocks

Individual stocks or related stocks can also experience morning market reactions based on off-hours events. Below, I’ll discuss a few of the primary triggers of individual stock price action to look out for.

Product Announcements

Company announcements of new products or breakthroughs are a frequent trigger for stock price movement. The affected company may experience positive or negative price changes based on the market view of the new offering. 

Additionally, a strong product offering or breakthrough from one company may trigger a price drop in competitor stock immediately following.

Company Financial Updates or Earnings

Quarterly earnings releases are one of the most common triggers for stock price improvement or deterioration overnight. Earnings are generally released after market hours or before market opening. 

Thus, the market reaction is not reflected in price trends until the general market opens in the morning. 

Companies may also announce positive or negative financial information that causes a market reaction.

Common examples include: 

  • Disclosure of financial liquidity 
  • Stock buybacks 
  • Mergers 
  • Acquisitions
  • Capital raising 

Announcements that indicate potential weakness in a company’s future stability or growth are likely to yield a negative response from the market.

FDA Approvals of Pharmaceuticals

Biotech stocks often see large swings in price tied to FDA approvals of various treatments or medicines. 

If the FDA declines to approve a company’s proposed drug or treatment, the market reaction is likely significantly negative as this indicates that a company may struggle to produce revenue in the future without an approved product. 

On the other hand, when FDA approvals are received, a company’s stock is likely to rise due to the viable new revenue stream.

Analyst Upgrades/Downgrades

Financial analysts from various companies assign grades and price targets to stocks based on their potential growth and success view. 

Depending on a company’s recent earnings or news, analysts may choose to upgrade or downgrade their opinion of a stock’s performance potential.

These updates may come at any time but often occur in the early hours of a trading day and can create a positive or negative price change based on the grade.

Summary

There are limitless factors that can cause the stock market to decline in the morning or at any given moment. However, changes to the overall market can generally be linked to a widely shared cause such as world or domestic news or economic updates. 

Individual stocks add even further possibilities for causation, most likely connected to financial or performance news of that company, competitor, or industry. Taking note of the timing and possible impact of such reports and events is key to making intelligent investment decisions.

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