One of the largest forces that affect stock prices are inflation, interest rates, bonds, commodities and currencies. At times the stock market suddenly reverses followed typically by published statements formulated out that the writer keen observation it on the market in turn allows to predict. Such circumstances leave investors somewhat awed and amazed needed about the infinite amount of actual training input and infallible interpretation, to avoid against the market. While continuing source of input that they need to successfully invest in the stock market, they are finite. If you contact me on my website, I'll be glad to share with you some. What is important is a robust model for interpreting any new information that comes along. The model should take into account human nature, as well as, major market forces. The following is a personal work cyclic model is not perfect nor complete. It is simply a lens change by sector rotation, industry behavior and market sentiment may be considered.
As always, any understanding of markets begins with the familiar human traits of greed and fear and the perception of supply and demand, risk and benefit. The focus is on perceptions where group and individual perceptions usually differ. Investors can count on them to produce the greatest return for the least risk seeking. Markets, the behavior of the group can rely on them to respond to almost any new information. makes the following recovery or relaxation price it seems that the first reactions to a lot to do nothing. But no, group perceptions simply oscillate between extremes and prices follow. It is clear that the overall market, as reflected in the great average, more than half the price of a share impact, while the result of change for most of the others.
In this sense, stock prices would rise, with falling interest rates because it is cheaper finance for businesses to finance projects and activities through loans. Lower borrowing costs, higher revenue, to increase the perceived value of a share. In a low interest rate environment, companies can borrow through the issuance of corporate bonds, with rates slightly above the average Treasury rate without excessive borrowing costs. Existing bondholders depend on their bonds in a falling interest rates, because the return they get nothing offered in newly issued bonds. Inventories, materials and existing bond prices tend to rise in a falling interest rate. Interest on debt, including mortgages, are closely related to the 10-year Treasury rate. If low, increased borrowing, effectively put more money in circulation with more dollars chasing a relatively fixed amount of shares, bonds and commodities.
Bond traders continually compare interest rate yields for bonds with those for stocks. Stock yield is calculated by the reciprocal P / E ratio of a file. Income divided by the price and yield results deserve. Here it is assumed that the price moves of a stock to reflect its profits. If stock returns for the S & P 500 as a whole are the same as the bond yields, investors prefer the safety of bonds. Bond prices then rise and stock prices fall due to finance. reduce As bond prices trade higher, due to their popularity, the effective yield on a bond of face value at maturity is fixed. If the actual yields continue to fall, bond prices top out and stocks begin to look more attractive, but connected at a higher risk. There is a natural oscillatory inverse relationship between stock prices and bond prices. In a rising stock market, the equilibrium is reached when the shares appear higher yields higher than yields on corporate bonds as yields higher than savings rates. Longer-term interest rates are naturally higher than short-term interest rates.
That is, until the introduction of higher prices and inflation. With an increased money supply, the rise in the economy through increased borrowing at low interest rate incentives, causes commodity prices. Commodity price changes permeate throughout the economy to affect all hard goods. The Federal Reserve, seeing higher inflation, interest rates will again increase the excess money from circulation to hopefully lower prices. Borrowing costs are rising, making it difficult for companies to raise capital. Stock investors, the perception of the impact of higher interest rates on corporate profits begin their expectations for earnings and share prices lower.
Long-term bondholders an eye on inflation because the real yield on a bond is equal to the bond less the expected inflation rate. Therefore, the rising inflation has previously issued bonds less attractive. The Finance Ministry has increased as a result the coupon or interest on newly issued bonds, so they can attract new investors in bonds. With higher prices for newly issued bonds, the prices of existing fixed coupon bonds falls, which increase their effective as well. So both the share and bond yields fall in an inflationary environment, particularly because of the expected increase in interest rates. Domestic stock investors and existing bondholders are rising interest rates bearish. Fixed return investments in the most attractive when interest rates fall.
Apart from that, there too many dollars in circulation, inflation can be increased by a devaluation of the dollar in foreign exchange markets. The cause of the recent decline of the dollar is the perception of reduced value of the continuing national deficits and imbalances. Foreign goods in the result can be expensive. This would be U.S. products abroad more attractive and improve U.S. trade balance. If, however, before that happens, foreign investors are considered to dollar investments less attractive, so that less money could be in the U.S. stock market will lead to a liquidity problem falling stock prices. Political unrest and uncertainty can also lead to increase the value of the currency to the value of the goods to reduce hard. Commodity stocks this quite well in this environment.
The Federal Reserve is seen as a gatekeeper that a thin line runs. It may raise interest rates to prevent not only inflation but also for U.S. investments remain attractive to foreign investors. This applies especially to foreign central banks who buy huge quantities of Treasuries. Concern about rising rates makes both stock and bond holders uneasy markets for the above reasons and shareholders for any other reason. If rising interest rates to many dollars from the market, it can lead to deflation. Companies are then unable to sell products at any price and prices fall dramatically. The resulting effect on stocks is negative in a deflationary environment by a simple lack of liquidity.
In summary, to move the stock price can have to offset the perception of inflation and deflation. A disturbance of this balance is seen usually as a change in interest rates and exchange rates. Stock and bond prices generally in the opposite direction due to differences in risk and the changing relationship between yield and apparent stock provides swing. If we see them moving in the same direction, this means a big change in the economy. A falling dollar raises the concern, higher interest rates, the negative influence on stock and bond prices. The relative size of the market capitalization and trading volume explain why bonds and currencies, a large effect on stock prices. First, we consider total capitalization. Three years ago the bond market from 1.5 to 2 times larger than the stock market. Regarding trading volume, the ratio of daily trading in currencies, bonds and shares then 30:7:1 respectively.