What Really Moves Markets?

Every day, markets move—and every day, headlines try to explain why. You may hear "stocks fell because inflation ticked higher." Or "the market rallied because a Fed official sounded dovish.” And increasingly we hear, "Tech surged because of earnings."

These headlines can be comforting because they satisfy our need for an explanation, but they oversimplify. Markets don’t move just because of a headline.

What really moves markets is the interaction between buyers and sellers in a giant, continuous auction. And what really drives that auction is liquidity, positioning, flows, and sentiment.

Liquidity: The Market’s Fuel

Liquidity is the ease with which assets can be bought or sold without large price swings. It comes from several sources but the primary drivers are:

• Global Markets

  Markets are enormous, and their sheer size makes them the dominant driver of liquidity. The U.S. equity market is worth over $50 trillion, while global equities exceed $120 trillion. When you include global bonds, private equity, real estate, and other financial assets, the total value of investable global assets reaches approximately $500 trillion.

  
  

Rising markets create a “wealth effect”: households feel richer, they spend more, and companies can issue stock to fund growth. When markets fall, the opposite happens: net worth shrinks, credit tightens, and liquidity in the real economy contracts.

• The Federal Reserve

  Through interest rates and balance sheet policy, the Fed can inject or withdraw liquidity from the system. Rate cuts and bond purchases expand liquidity; rate hikes and balance sheet runoff reduce it.

  
  

• U.S. Treasuries

  Government debt issuance also impacts liquidity. Heavy issuance of long-dated Treasuries can drain cash from risk assets, while short-term bill issuance often has a lighter effect.

  
  

• The Economy

  Growth generates liquidity through corporate profits, wages, and reinvestment. Slowdowns do the opposite.

  
  

• The Financial System

  Banks and credit markets expand liquidity when lending is easy and contract it when credit conditions tighten.

  
  

Positioning and Flows: Who Owns What, and How?

Beyond liquidity, who already owns assets and where new money is flowing plays a huge role in market direction.

• Investor Positioning

  If everyone is already bullish and fully invested, there are fewer buyers left to push markets higher. Conversely, when investors are looking to buy, even modest good news can spark rallies.

  
  

• Structural Flows

  Some flows are steady and price-insensitive, creating persistent demand:

  
  

  • Corporate Buybacks

    Companies are among the largest and most reliable buyers of stock. Buybacks reduce supply and support prices regardless of valuation.

  • Retirement Contributions

    Monthly 401(k) contributions and pension allocations flow into markets automatically, especially into index funds.

  • Passive Investing

    ETFs and index funds buy in proportion to index weights, regardless of fundamentals, creating ongoing inflows.

    
    

On the other side, we have the opposite:

• Forced Selling

  Margin calls, hedge fund deleveraging, or rebalancing from risk-parity strategies—can overwhelm buyers and trigger sharp declines.

Sentiment: The Emotional Multiplier

Liquidity and positioning set the stage, but sentiment often determines the script. Investor psychology—fear, greed, optimism, pessimism—can magnify market moves far beyond what fundamentals or flows alone would justify.

• When sentiment is optimistic, investors tend to overlook risks, extend leverage, and bid prices higher.

  
  

• When sentiment turns fearful, even small shocks can cascade into selling waves.

But have you noticed that the same piece of news can trigger wildly different reactions depending on the mood of the market?

That's because surveys, volatility indices (like the VIX), and fund flow data all offer clues about prevailing sentiment, but the truth is more subtle: sentiment reflects the collective emotional state of millions of market participants.

And when sentiment swings to extremes, either fear or greed, it can be a sign that the market is near a turning point. Extreme greed might mean most buyers are already in, hinting at a possible top, while extreme fear could suggest the worst is priced in and a bottom may be forming.

Flows vs. Fundamentals:

The Voting Machine vs. the Weighing Machine

Benjamin Graham, mentor to Warren Buffett, had a line that still captures the reality of markets today:

In the short run, the market is a voting machine, but in the long run, it is a weighing machine.

Flows - The Voting Machine - Short to Medium Term

Prices reflect popularity—how many buyers versus sellers show up on a given day. Liquidity, positioning, flows, and sentiment dominate. That’s why markets can rise for years even when valuations appear stretched. Sounds pretty similar to current times, doesn't it?

Fundamentals - The Weighing Machine - Medium to Long Term

Fundamentals and valuations eventually matter. Periods of excessive optimism or pessimism tend to correct, sometimes sharply, when reality reasserts itself. This explains why markets can look “irrational” in the moment, but they cannot escape fundamentals forever.

Illustration: How Market Drivers Factored in Q2 2025

In early 2025, when the market sold off after new tariffs were announced, it looked like a reaction to the headlines.

Everywhere you turned, the news was full of fear — talk of a trade war, slowing growth, and global uncertainty. But what really drove the drop wasn’t just the news itself — it was how investors were set up going into it.

Before the selloff, everyone had gotten pretty comfortable. Sentiment was strong, positioning was crowded, and a lot of people were leaning the same way — long, optimistic, and exposed. In other words, a lot of investors were heavily betting on the market to rise — they were optimistic and had put a lot of money into that view, leaving them vulnerable if things went the other way. So when the tariff story hit, it caught people off guard. The sudden shift in tone sparked a wave of selling, not because anything had fundamentally broken, but because people had to unwind those positions quickly. The VIX spiked (remember, the VIX is the market's so-called "fear gauge"), liquidity dried up, and prices dropped fast.

Then came the flip side! After the initial panic, sentiment turned sharply negative. Investors who had been chasing gains were now pulling back, hedging, reducing risk, or sitting on the sidelines. But once enough fear had set in and people were positioned more cautiously, the market found its footing. Liquidity started to return, and with fewer sellers left and sentiment overly bearish, prices began to recover — even though the headlines hadn’t really improved.

For me, it was a clear reminder: markets move based on positioning, flows, and sentiment more than just the news itself. The tariffs may have triggered the move, but the real drivers were how people were feeling, how they were positioned — and whether there was enough liquidity when things turned.

The Takeaway: What Really Moves Markets?

Because the market is so massive, it doesn’t just reflect the economy—it shapes it. Rising markets expand household wealth and corporate opportunity; falling markets do the opposite.

So the next time you see the market surge or sink, remember this:

Headlines tell stories. Fundamentals set the backdrop. But more often than not, it's the deeper mechanics of liquidity, positioning, flows, and the mood of investors that really moves the markets.

Now that you know all this, you're less likely to be manipulated by the headlines and swift market changes... which puts you a step ahead of the average investor.

Happy Investing!

P.S. If you still have questions or want to share your thoughts, I love to hear from you, so just email me.