What makes markets go up and down? Economic growth, earnings growth, monetary policy, inflation, changing risk premiums, return expectations, and more. But, simply put, market movements all boil down to supply and demand. More money flowing into the stock market then investors are taking out will drive stock prices and, therefore, the value of your equity mutual funds, higher. More money going into the debt markets then being withdrawn will drive down interest rates and increase the value of bonds and bond funds.
Where does this additional money come from? Overseas investors and private equity funds which pay cash and take companies out of the public market are two sources. And, there’s a third source, a seasonal source, which occurs every year between January and mid-April.
The first quarter of every year is when most employees receive bonuses and/or their employer retirement plan contributions (or get around to investing if these payments occurred in December). In addition, the first quarter of the year is the last chance to make IRA and 401-K (or another non-employer sponsored retirement plan) contributions. The deadline for retirement-related contributions is typically April 15th (April 17th this year).
So, tomorrow the great annual retirement plan funding season draws to a close for another year and a source of new monies flowing into the market dries up. This is another reason why I’d be a cautious investor right now. But don’t despair --
Elvis will return next January.
