Stock market’s real driver is not what you think – Daniel Greenwald

Daniel Greenwald

MIT Sloan Assistant Professor Daniel Greenwald

From MarketWatch

What makes the stock market move over the long term? While stocks have historically delivered positive returns year-over-year on average, it is not clear why stock prices rise more rapidly in one period than in any other.

With my colleagues, Martin Lettau of the U.C. Berkeley Haas School of Business and Sydney Ludvigson of New York University, I set out to investigate what makes stocks move over time. What we found was surprising.

Despite the widespread belief that firm productivity is a key driver of stock market returns, our results indicate that fluctuations in productivity play only a small role. Far more influential over long periods is the economic redistribution between workers and shareholders — meaning how a company’s profits are divided between employees and investors.

Our first step in this research was to consider which factors might be responsible for movement in the stock market in aggregate. Each firm that is represented in the stock market index produces a stream of revenues. After paying a portion to workers, the rest is left over as profits that can be distributed to shareholders as dividends. The stock price will rise whenever the rewards to the shareholders increase, which can be caused by one of three separate forces:

  • Productivity: The firm becomes more productive, increasing its stream of revenues. This increases the size of both slices, including the shareholders’ slice.
  • Redistribution: The size of the pie remains fixed, but the firm pays a smaller share to the workers, increasing the shareholders’ slice.
  • Market confidence: Neither the size nor the division of the pie changes, but more risk-tolerant investors demand more stock despite there being no change in their current dividends.

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What can mother nature teach us about managing financial systems? – Andrew Lo

Read the full post at The Christian Science Monitor

Andrew W. Lo is the Charles E. and Susan T. Harris Professor, a Professor of Finance, and the Director of the Laboratory for Financial Engineering at the MIT Sloan School of Management.

Opinion: Even stock traders get the back-to-school blues — and we all feel it — Lily Fang

MIT Sloan Visiting Associate Professor of Finance Lily Fang

MIT Sloan Visiting Associate Professor of Finance Lily Fang

From MarketWatch

It’s widely known on Wall Street that September is the worst month for stocks. This is not just trader superstition. An article published in the Wall Street Journal last year points out that since 1896, the Dow Jones Industrial Average has lost 1.09% in September on average, while returns for every other month average 0.75%. Moreover, September is the only month that shows average declines over the past 20, 50, and 100 years.

While the September swoon is no secret, its precise cause is elusive. Possible explanations for the lower returns range from the complex — one study theorizes that portfolio managers sell stocks with recent losses in September to take advantage of tax breaks before the end of their tax year in October; to the dubious — some strategists claim it’s pure randomness; to the downright bizarre — a study by University of Kansas suggests that the decline in the amount of daylight in New York City in September might spark seasonal affective disorder and make some traders more risk-averse.

Importantly, this lower return was not driven by September alone, even though the September effect is pervasive in the northern hemisphere. Even when September is excluded, there is still a return gap of at least 0.5% between after-holiday months and other times, and the difference remains highly significant.

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Opinion: How you can use earnings release dates to predict stock movements — Eric So

MIT Sloan Asst. Prof. Eric So

From MarketWatch

If you have good news, you want to rush to tell people about it. If you have bad news, you tend to stall, hoping it will go away or that some good news will come along to dilute it. Companies, it turns out, behave similarly — and therein lies an extraordinary opportunity that most investors have been missing.

I recently studied whether the announcements companies make when they reschedule earnings reports contain important information about the firms. This earnings season, for instance, investors may notice that Apple Inc.AAPL, -0.53%   moved forward its expected earnings announcement date to Oct. 20 from Oct. 28. Meanwhile, Coca-Cola Co. KO, -0.64%   has delayed its expected reporting date to Oct. 21 from Oct. 14.

What can investors predict from such behavior? Often, quite a lot.

When companies shift a scheduled reporting date, the announcement typically appears routine. Some financial reporting dates are set by regulation, but firms have discretion in scheduling earnings reports.

In this study, I analyzed the corporate reporting calendars of some 19,000 companies from 2006 through 2013. Wall Street Horizon, Inc., a firm that collects events information of publicly traded companies, provided the data.

I discovered that firms which moved up their reporting dates were considerably more likely to report higher earnings, while those that delayed their reporting dates tended to announce earnings declines. The stock values of the companies tracked closely with the earnings trends.

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Climbing a Wall of Worry — John DeTore

MIT Sloan Sr. Lecturer John DeTore

The U.S. stock market is now at new highs. So why are average Americans continuing to struggle and not feeling this prosperity? What causes this apparent disconnect between market highs and citizen well-being?

As the expression goes, stocks are climbing a wall of worry. And by our estimates, despite economic malaise, the stock market hasn’t peaked, and we’re still on the way up. Here are some reasons why:

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