Share Market Evaluation Methods

Technical factors include the following: Inflation factor influences shares prices variableWe mentioned it earlier as an input into the valuation multiple, but inflation is a huge driver from a technical perspective as well. Historically, low inflation has had a strong inverse correlation with valuations (low inflation drives high multiples and high inflation drives low multiples). Deflation, on the other hand, is generally bad for stocks because it signifies a loss in pricing power for companies. Economic Strength of Market and Peers factor influences shares prices variableCompany stocks tend to track with the market and with their sector or industry peers. Some prominent investment firms argue that the combination of overall market and sector movements-as opposed to a company's individual performance-determines a majority of a stock's movement. (Research has suggested the economic/market factors account for 90 percent of it.) For example, a suddenly negative outlook for one retail stock often hurts other retail stocks as "guilt by association" drags down demand for the whole sector.Substitutes factor influences shares prices variableCompanies compete for investment dollars with other asset classes on a global stage. These include corporate bonds, government bonds, commodities, real estate, and foreign equities. The relationship between demand for U.S. equities and their substitutes is hard to figure, but it plays an important role.Incidental Transactions factor influences shares prices variableIncidental transactions are purchases or sales of a stock that are motivated by something other than belief in the intrinsic value of the stock. These transactions include executive insider transactions, which are often pre-scheduled or driven by portfolio objectives. Another example is an institution buying or shorting a stock to hedge some other investment. Although these transactions may not represent official "votes cast" for or against the stock, they do impact supply and demand and, therefore, can move the price.Demographics factor influences shares prices variableSome important research has been done about the demographics of investors. Much of it concerns these two dynamics:1.Middle-aged investors, peak earners who tend to invest in the stock market2.Older investors, who tend to pull out of the market in order to meet the demands of retirementThe hypothesis is that the greater the proportion of middle-aged investors among the investing population, the greater the demand for equities and the higher the valuation multiples. Trends changing factor influences shares prices variableOften a stock simply moves according to a short-term trend. On the one hand, a stock that is moving up can gather momentum, as "success breeds success" and popularity buoys the stock higher. On the other hand, a stock sometimes behaves the opposite way in a trend and does what is called reverting to the mean. Unfortunately, because trends cut both ways and are more obvious in hindsight, knowing that stocks are "trendy" does not help us predict the future.