Registered: Aug 2012
08-17-12 08:33 AM
There’s a battle raging on Wall Street. The Bulls are looking for a market bottom and the Bears are saying the selling will continue. Both camps are making their point with a plethora of facts, fiction and fluff. How can we cut through the flack and focus on what’s really going to happen?
Three Powerful Forces Driving the Market
Astute investors know three powerful forces drive the stock market. These forces are known to everyone, but are often misunderstood. They are related, but independent. They are measurable, but controversial. They convey the affects of all that happens, and ultimately determine the fate of the market.
1. Corporate Earnings
When a major event such as an assassination, earthquake, or international financial crisis occurs, investors instinctively speculate on whether the event will help or hurt the stocks they own. If the event seems likely to help corporate earnings, prices rise. Conversely, if the news is perceived to be harmful, prices fall.
The bug-a-boo of a strong economy is inflation. Inflation, of course, causes raw material, labor and service costs to increase. Unless a company increases productivity and raises prices, profit margins narrow and earnings go down.
Rising inflation rates ultimately push stock prices down. It not only lessens the value of financial assets, it erodes the purchasing power of consumers. Left unchecked, inflation destroys monetary stability and leads to a weak economy.
3. Interest Rates
The Federal Reserve is charged with the responsibility of maintaining monetary stability. It fulfills this task by controlling the money supply. When the Fed sees inflation increasing, it tightens the money supply and interest rates go up.
Ironically, higher interest rates raise costs. It stifles investment, weakens the economy, hurts corporate earnings and eventually leads to a Bear market.