Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 172

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 Asia).
  • 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.

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  • Book Chapters
    Table of Contents Copyright and Disclaimer Foreword Money
    Bonds Futures Stocks Options
    Mutual Funds Retirement Final Words Appendix A
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