nudging interest rates higher. Conversely, interest rates decline when
the threat of inflation is abated. During the periods of low interest rates
companies can borrow more money and expand. They hire more
people and thus personal income is increased. People can borrow more
and spend more money, buying products from companies, helping
them to increase revenues. As companies do better, so do their
respective stocks. This kind of sustained prosperity for the stock market
is known as a bull market. Clearly a good time to be invested in the
stock market. During most of the 90s we had a terrific bull market. The
period leading to the 1929 stock market crash (and the subsequent
depression era) was also a bull market.
But all good things must come to an end, and inflation is the beast
that can crash the party. When the threat of inflation sets in, interest
rates start to climb. Companies cannot borrow as much to expand.
People have less money to spend on products. As companies do worse,
so do their stocks. A sustained and long running decline or stagnation
in the stock market is known as a bear market. Some would argue that
we entered such a situation in the year 2000 as a result of several interest
rate hikes in the late 90s by the Fed. The period after the 1929 stock
market crash is also an example of a bear market, where it took the
stock market decades to reach its pre-crash value. The 70s also
experienced periods of bear market (interestingly enough, the 70s were
also a period of immense inflation). Some signs that may point to a
downturn in the stock market would be:
- Bad economic conditions abroad (areas such as in Europe or
- Ultra-low unemployment.
- Accelerated price increases in food and energy (e.g., oil prices).
- High trade deficit, since it means that companies' sales are not
doing well abroad. …