I have always been intrigued by the stock market but never really understood the short and long-term drivers of stock market performance. History tells us that the stock market goes up over time. If that is the case, then why do we see so much short-term volatility? What dynamics are at play to create these crazy gyrations in the stock market? Why do emotions such as fear and greed come into play so often? In my project, I study these dynamics and try to make sense of it all. Moreover, I use the recent shock to markets – the COVID-19 pandemic – as a case study for how big, unexpected events impact investor behavior and stock market performance. With more people working from home combined with the rise of social media and free stock trading, an entirely new cadre of investors has entered the stock market and leading it to new all-time highs. Is this sustainable or is the market at serious risk of declining? Will this new group of investors have a positive or negative impact? These are the driving questions that led me to pursue this project.
My interest in the stock market started a few years ago. At my elementary school I had to do a big project each year about something that interested me, very similar to Grace’s March Madness project. I chose to look at saving and investing and the benefits of starting young. My father and I used this opportunity to invest money that I had earned into a handful of stocks. Fortunately I invested in very high quality companies that have performed well. Watching my hard earned money grow in the markets sparked even more interest and curiosity. As a result, I thought this project would be a perfect opportunity to continue this journey and gain a deeper understanding of the stock market.
While I had some experience investing in individual companies, I never had any experience understanding the drivers of the broader stock market. I used this project to dive deeper into the history of the stock market and to develop a stronger understanding of why the stock market works the way it does.
I developed an interest in understanding how big events impacted the stock market differently today. With so much technology and data at our disposal, it is really interesting to see how the stock market reacts to events now versus the past. It appears that the speed at which the markets adjust to events today is far quicker than in the past.
I spoke to adults who have had significant experience investing in the stock market. Learning from those who have endured more than a few bear markets was more interesting than reading any online source. Hearing first hand about successful investment strategies as well as failed ones, I gained a much greater appreciation of what it takes to be a successful stock market investor. I will take these lessons with me as I mature as an investor and hopefully avoid making some of the same mistakes.
The end result is a slide show that will hopefully educate my fellow classmates on the history of the stock market, the drivers of the stock market, and the impact of COVID-19 on the stock market. The end result also led me to conclude that like so many things, history tends to repeat itself in the stock market. While fear and greed tend to dictate short term fluctuations in the market, over time the stock market is driven less by emotion and more by economic growth and corporate profits so fighting the temptations to buy when those are greedy and sell when investors are fearful has been a winning formula for long-term investors.
In the beginning of the year, I only wanted to focus on how COVID-19 affected the stock market. As the year went on, I became more interested in other factors that affect the stock market. I became particularly interested in how emotion plays a role in the stock market. I also decided to provide more historical context to the stock market instead of jumping right into COVID-19.
The most significant challenge was narrowing down what to add into my project about the stock market. There are so many variables that drive stock market performance. The point of this project was not to give every single detail, but to distill it down to topics that I thought would be most important for my thesis.
If I was going to continue my project, the next thing I would do would be to track certain individual stocks. I would like to see how different stocks have been affected by the pandemic and whether they continue to outperform or underperform.