Why is the stock market so difficult to predict?

Why is the stock market so difficult to predict?

Stock market is not a singular factor, but is derived through a series of multiple factors, and not only do they affect the stock market directly, but also affect other factors as well, which again influence the stock market.

Consider the game of cricket for a simple analogy.

Result of a match depends on the performance of the team. Performance of a team depends on quality players in the team and also several factors like Pitch conditions, Dew factor, Ground dimensions, etc.

And it not that these factors only affect the result, but each of the factors also affects other facto, like Pitch conditions affect the performance of players, etc.

Similarly, in the market, there are several factors that not only influence the market directly but also affect other factors that in turn affect markets. All these make the overall prediction of the stock market a complex task, not only due to the number of variables involved, but also how these variables affect each other.

Let us take the Porters Five Force Model as a simple framework to study which are the factors that influence business in general, the impact of which can be seen in the market as large as well.

Porters Five Forces Model talks about the 5 major macro factors that influence the activity of a business. We will study each force in detail to get a view which factors affect a business generally and consequently the stock market.

These 5 factors are –

1. Threat of new potential entrants

2. Threat of substitute product/services

3. Bargaining power of suppliers

4. Bargaining power of buyers

5. Rivalry among current competitors

1. The threat of New Entrant – Potential competitors refer to the firms which are not currently competing in the industry but have the potential to do so if given a choice. The entry of new players increases the industry

The threat of new entrants into an industry can force current players to keep prices down and spend more to retain customers. New entrants bring new capacity and pressure on prices and costs

The threat of entry, therefore, puts a cap on the profit potential of an industry. This threat depends on the size of a series of barriers to entry, including economies of scale, to the cast of building brand awareness, to accessing distribution channels, to government restrictions. The threat of entry also depends on the capabilities of the likely potential entrants. These all factors affect the profitability of future potential of the firms.

The impact of entry of Jio into telecom market and it’s the huge impact is a great example.

2. The Threat of Substitute Products and Services - When a new product or service meets the same basic need differently, industry profitability status is hugely impacted. The threat of a substitutes product is high if it offers an attractive price-performance trade-off relative to the industry's current products or is switching costs are low.

Growth of Mobile phones affecting the tablet market, a new variety of coffee affecting the market for Tea or Electric vehicles replacing Petrol cars is a few examples of this case.

3. Bargaining power of suppliers – Suppliers refer to the firms that provide inputs to the industry. Bargaining power of the suppliers refers to the potential of the suppliers to increase the prices of inputs( labour, raw materials, services, etc) or the costs of the industry in other ways. Companies in each industry purchase various inputs from different suppliers, which account for different proportions of cost for them. Power supplies can use their negotiating leverage to charge higher prices or demand more favourable terms from industry competitors due to their competitive position, which lowers industry profitability and overall company prospects. If there are only one or to suppliers of an essential input product, for example, or it switching Suppliers inexpensive time consuming, a supplier up will have more power.

For Example – Large company like Intel, specialised in a specific Computer chip bargaining power over manufacturers who source products from Intel.

4. Bargaining power of the Buyers – Buyers refer to the customers who finally consume the product or the firms who distribute the industry’s product to the final consumers. Bargaining power of buyers refer to the potential of buyers to bargain down the prices

Powerful customers can use the power to bring prices down or demand more service-affecting prices, thus capturing more value for themselves but affecting business profitability and future potential. Buyer power is highest when buyers are at large in number and the competitors serving those products are undifferentiated, and there are few switching costs to shitting business from one competitor another.

They can play rivals against each other especially if an industry's products are undifferentiated and it's easy to switch loyalties.

For example, it is easy to switch between companies offering Android phones, but cost switching from iOS to Android is quite higher.

5. Rivalry Among Existing Competitors - If rivalry is intense, it drives down prices or reduces profits by increasing the cost by various factors like altered product lines, increased advertisement budget, etc. Rivalry refers to the competitive struggle for market share between firms in an industry. Extreme rivalry among established firms poses a strong threat to profitability. It depends on several factors like Fixed costs incurred by the industry, competitive structure, customer target group for each industry and demand conditions of the industry.

So as we can see, even for a single business, how the multitude of factors play a combined role to determine the overall business performance and future potential.

Consider it for an industry with many such companies competing against each other. Then consider an Economy containing many of such major and minor industries.

All these Industries in Economy affected by additional national, international, economical, social and political factors.

You can just imagine the scale at which these things operate and function to build an overall system, which is represented by the Stock Market. So due to these large number of interdependent factors associated with the Stock market in an unpredictable environment and uncertainty due to tracking of future movement, the stock market becomes so difficult to predict.

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