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Why do all stock prices tend to move in the same direction?

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David John Marotta
President, Marotta Wealth Management, Inc., Marotta Wealth Management, Inc.
http://www.emarotta.com  
434-244-0000

David John Marotta is the President of Marotta Wealth Management, a fee-only financial planning and asset management firm in Charlottesville, Virginia. He is an oft-quoted writer and speaker on financial matters and his weekly financial column can be found at www.eMarotta.com

Why do all stock prices tend to move in the same direction?

 

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Host:Why does every company s stock price tend to move in the same direction?

David John Marotta:Stock prices tend to move in the same direction which we call being highly correlated because the economy as a whole ends up moving up and down. So, when people are happy and they are getting raises and their houses are going up in value, then they have more discretionary income, they are buying more products and companies are selling more products. When there is a recession and people are having their houses for close and people are losing their jobs then, they are not buying as much and they are trimming back on all of their discretionary purchases. So, all the companies are not making as much money.

It is probably about 75% to 80% of the US economy is discretionary spending and so that drives most of the markets. Now, there are a few kinds of industries that generally do not move in sync with the rest of the US markets. They are often the ones in the hard asset category.

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