What moves the stock market

Stocks don't move in a vacuum. Interest rates, inflation, jobs and economic growth set the backdrop for every chart you look at. You don't need to be an economist, but you should know which numbers matter and how the market tends to react to them.

Lesson 61 of 76 · 2 min read

The big four: rates, inflation, jobs and growth

Most market-moving news fits into four buckets. The first and most powerful is interest rates, set by the U.S. central bank, the Federal Reserve (the Fed). Lower rates make borrowing cheaper and make future company profits worth more today, which tends to help stocks, especially fast-growing ones. Higher rates do the opposite.

The other three buckets mostly matter because of what they mean for rates. Hot inflation can force the Fed to keep rates high. A very strong jobs market can feed inflation. Weak growth can bring rate cuts, but also lower profits.

Inflation: CPI (Consumer Price Index) and PCE (Personal Consumption Expenditures, the Fed's preferred gauge).
Jobs: the monthly employment report (nonfarm payrolls and the unemployment rate) and weekly jobless claims.
Growth: GDP (the total output of the economy) and the ISM surveys of manufacturing and services.
Spending: retail sales, which shows how much consumers are buying.

Why good news can be bad news

Beginners are often confused when a strong jobs report sends stocks lower. The reason is the Fed. If the economy looks too hot, traders expect rates to stay higher for longer, and that weighs on stock prices. In the same way, a weak report can lift stocks if it raises the odds of a rate cut.

This flips over time. When investors fear a recession, bad news is simply bad news, and good news is welcome. The same number can mean different things in different years, so don't memorize a rule like "strong jobs = stocks up".

Expectations matter more than the number

Before every release, economists publish a forecast, often called the consensus. Prices already reflect that forecast. What moves the market is the surprise: how far the actual number lands from what was expected, and what it changes about the outlook for rates.

That is why a number that sounds bad can produce a rally. If inflation came in at 3.2% when traders feared 3.5%, the market may cheer a figure that is still too high.

Watch the reaction, not the forecast

You can't trade the forecast reliably, and you don't need to. The method popularized by William O'Neil reads the market itself. After a big release, ask simple questions: Did the indexes close higher or lower? On more or less volume than the day before? Did leading stocks hold their gains?

A market that shrugs off bad news is showing strength. A market that sells off on good news is showing weakness. The index action, measured by distribution days and market direction, is the final judge. Macro data explains the move; price and volume confirm it.

Common mistakes

Trying to predict economic numbers and betting big before the release.
Assuming a strong report must be good for stocks without thinking about rates.
Ignoring the calendar and getting surprised by a big gap on CPI or Fed day.
Letting news headlines override what the indexes and your stocks are actually doing.

Key points

Interest rates are the main macro force behind stock prices; inflation, jobs and growth matter mostly through their effect on rates.
The market reacts to surprises versus expectations, not to the raw number.
Judge the news by the market's reaction in price and volume, not by your own forecast.

Check what you learned

Answer at least 2 of 3 correctly to complete the lesson.

1. Why can a very strong jobs report send stocks lower?

2. Traders feared inflation of 3.5%. It comes in at 3.2%, still above target, and stocks rally. Why?

3. After a big economic release, what is the best way to judge its effect?

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