Which shareholders cause news-driven whole market stock swings?

Question

Today the DJIA dropped 275 points and some media entities ascribed this to U.S. unemployment figures, also released today, particularly amid other ongoing news about European economic problems.

What I'd like to understand is: Whose news-driven sell-offs are causing such drops?

I ask because I can think of a number of classes of shareholders who wouldn't sell on such news. For example, I'd think that an appreciable part of the ownership of the DJIA are owned by the "average guy" who owns stocks as part of his 401k. My guess is he is not learning of U.S. unemployment figures or Spanish bank crises and then calling his fund manager and telling him to sell his holdings--I'd guess the average 401k holder is mostly oblivious to the financial world in this way (though he might panic sell at times like early 2009's bottom).

The same would go for "old fashioned" investors who buy large and well-known companies like IBM, trust in the market, and just hold it for many years while mostly not paying attention to the economic factors. Day, swing, and other technical traders for the most part just trade on chart patterns. Fundamental analysis traders trade mostly on individual companies' facts on paper.

So--if it really is news causing sell-offs (or buy-ins)--which sector of traders are reacting to the news so strongly and in such numbers as to cause such significant changes in the DJIA? (for example, today's drop wiped out all of 2012's gains)

I'd guess mostly large investment corporations, but also to some degree traders who pay attention to world events, but any elaboration that gives me a sense for the proportion of the market owned by "news-triggered and market-swinging" entities would be helpful.

This is in part a practical question in that I want to understand what to expect--if anything can be expected reliably--for my own enters/exits into the market given my read of world events.

Answer 1

The people who cause this sort of sell-off immediately are mostly speculators, short-term day-traders and the like. They realize that, because of the lowered potential for earnings in the future, the companies in question won't be worth as much in the future. They will sell shares at the elevated price, including sometimes shares that they borrow for the explicit purpose of selling (short selling), until the share price is more reasonable.

Now, the other question is why the companies in question won't sell for as much in the future:

• If a company is going to be acquired in the future, by another company or by a private-equity firm, the acquirer won't be willing to pay as much because there's not as much profit potential.
• The managers of many mutual funds, hedge funds, pension funds, investment banks, and insurance companies not only have a duty to earn returns, but they earn their pay based on how big of a return they're going to make. Since they want to earn a big return, they're going to invest money where it's most profitable. If a company looks like it will be less profitable in the future, they will be less willing to put the money there.

Even if every other company in the world looks less attractive all at once (global economic catastrophe etc) people have other options. They could just put the money in the bank, or in corporate bonds, or in mortgage bonds, or Treasury bonds, or some other low-risk instrument, or something crazy like gold. If the expected return on a stock doesn't justify the price, you're unlikely to find someone paying that price. So you don't actually need to have a huge sell-off to lower the price. You just need a sell-off that's big enough that you run out of people willing to pay elevated prices.

Answer 2

News-driven investors tend to be very short-term focussed investors. They often trade by using index futures (on the S&P 500 index for instance).