Does Stock Market History Affect Future Prices of Stock?
Since the stock market was created, people have been trying to hack the system and get rich quick. A lucky few have. More use the stock market as a way to grow their wealth over decades, not days. If you’re just starting out investing on your own, it can be overwhelming. Does stock market history affect the future price of stocks? Is a stock that performed well a few years ago more likely to shoot up in price again?
Past performance doesn’t guarantee future behavior
The first rule of the stock market is that past performance doesn’t guarantee future behavior. Stocks go up and down all the time. Banking on a stock following a perfectly cyclical pattern is just going to get you in trouble. In that sense, stock market history doesn’t affect the future price of stocks.
What does affect the future price of stocks is the reason they rose or fell in the past. For example, stock can surge (or plummet) when there’s a change in leadership at a major firm. If an established company has a new innovator at the helm, you can try to use that data to predict whether their stock is going to grow or not. It’s much more difficult than just looking at the numbers, which is why playing the stock market isn’t for the faint of heart.
A stock’s performance can dictate target prices
A stock’s current and past prices affect the target prices for that stock. The target price is determined by an earning’s forecast and assumed valuation multiples. Essentially, the analyst is picking the numbers to buy and sell at in order to make the most profit from a stock. While it’s still as much art as science (even though “valuation multiples” sounds like the kind of jargon that gets results) this process helps small investors find their place in the stock world. Stock ratings are built with a long view in mind. The analysts who write them are typically better suited to risk their money, and have more to invest in the first place. Rather than accepting someone’s judgement on “buy” or “sell”, small investors can build their own opinions based on the target prices.
Patterns repeat, but aren’t easy to capitalize on
Stock market history is full of repeating patterns. Most of these patterns are only easily recognizable in hindsight. The circumstances of the Great Depression are now widely studied, but the world still goes through recessions. Knowing some of the signs doesn’t stop it from happening again. Is this downturn the beginning of the end, or just a bump on the rise to the top? Both are possible. Stock market history and looking for patterns is difficult for the small investor, and the main business of investment firms.
Stock market history does affect the future price of stocks, but the line of cause and effect isn’t particularly linear. Small investors are better served by different investment methods. Too often it’s only possible to see the pattern repeating in hindsight.