Full recession and consumer expectations
Despite the seeming incongruity, it is during a complete recession that you first begin to notice evidence of improved consumer expectations, which are indicated by rising costs. However, industrial productivity still shows no signs of improvement, and companies are not in a hurry to increase production levels until they get the impression that consumers are really ready to spend their money again. In addition, interest rates continue to fall, as the costs of companies and consumers remain low. As a result, the demand for money weakens, while between banks and other financial institutions there is growing competition for new loan recipients. At the stage of complete recession, cyclical and technological shares usually take the lead. During the recession stage, investors seek to ensure their own safety, therefore companies that are able to satisfy this need of investors are usually in a better position.
To find out at what stage of the business cycle the economy is at one time or another, it is necessary to track economic indicators. Every day, opening a fresh newspaper, you see there at least one publication on the current economic situation. Estimates found in such publications are based on various economic indicators. The most common economic indicators are unemployment, money in circulation, interest rates, number of new buildings, housing prices, production levels, purchase statistics, consumer confidence and many other factors that reflect the current state of the economy.
Economic indicators are very useful for you as a trader. Some of them are of more interest to you than others. The volume of this book does not allow us to provide a detailed description of each of the economic indicators, so we will focus only on those that are able to bring you the most benefit in the decision-making process associated with the purchase of shares.
Watching the Fed, or How Interest Rates Affect Markets
Monitoring the measures taken by the Federal Open Market Committee of the Federal Reserve System and monitoring the situation with interest rates is the subject of constant attention of the economic press. Despite the fact that FOMC members hold meetings only eight times a year, discussions about whether the Federal Reserve System will raise or lower interest rates are held in the economic press almost daily. After each of the next speeches by Fed Chairman Alan Greenspan, people try to guess the true intentions of the Fed. The speeches of other Fed members, which usually occur between FOMC meetings, are also carefully studied. Most of the materials published in the press, one way or another, boil down to attempts to predict, reduce or increase the interest rates of the Fed.
The most important reason why you should be interested in interest rate changes is the following: any change in interest rates can have a serious impact on the economy as a whole and, therefore, on your stock purchase / sale operations.Higher interest rates tend to lead to lower costs, which in turn can lead to a slowdown in economic growth.
Volume of money supply in circulation
One of the most important indicators that you, as a trader, need to carefully monitor is the amount of money in circulation. The fact is that the growth of the money supply in circulation can serve as one of the early indicators of growing inflation. When the amount of money in circulation exceeds the real supply of goods, prices are likely to creep up. Commodity and money traders should clearly monitor the following three aggregate indicators: the amount of money in circulation, the rate of inflation, as well as the actual volume of goods and services.
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