When ever an individual endows in a stock market, it is essential for him or her to keep their focus on anything and everything that has the potential to have an effect on their stocks. There are numerous factors that may affect your stocks - some of the predictable, some unforeseen. It is possible that some events, such as a war, terrorist attack or recession, may just seem to be a bolt from the blue and create a chaotic condition in the stock market. Remember, there is noting like uncertainty that is abhorred by the stock market. Did you ever wonder why the recent bear market persisted for such a long period? Well, if you haven't, you should know that the primary reason for this was that people were uncertain about so many things. They were in doubt as to when the recession would come to an end, whether the United States was going to war and if we would triumph in the war against terrorism. Even as the investors seek to protect their money endowed in cash, gold or real estate, any of the above-mentioned events are capable of sending the stock market lower.
Whether you are an investor or a merchant, you should always be conscious of the external happenings that have the potential to create an impact on the stock market and, thereby affect your stocks. Every now and then it is helpful if you look back and make out the larger financial scenario and take stock of things. If you are able to foresee the manner in which any incident could have an effect on the stock market, you would be able to transfer your hard earned money to more advantageous endowments. Some experts are of the view that having a comprehensive perception of the investment atmosphere is more crucial compared to putting your money in the correct share.
Here it is important to bear in mind that the Federal Reserve System or the Fed is such a dominant government group that no matter what action is initiated by it, it is bound to affect the stock market. You will time and again hear about the exploits of the Federal Reserve Bureau (FRB), a seven-member group that guides and governs the activities of the Federal Reserve System.
The numerous responsibilities or duties of the Fed include keeping an eye on the economy, particularly vis-à-vis problems like inflation and deflations as well as regulating the money supply in the country. The Federal Reserve System possesses a very authoritative means - the facility to move up or bring down the interest rates - that openly have an effect on the stocks and bond markets. However, the Fed does not increase or decrease the interest rates by turning over any knob. On the contrary, the Fed purchases or sells Treasure securities worth millions of dollars and this, in turn, enabled it to control as well as change the interest rates in the market.
After going through this much, you must be wondering why is it so essential to lower or raise the interest rates in the market. In fact, when the Fed sells the Treasury securities it results in a drop in the interest rates in the market and this enables people to get loans more inexpensively. In any case, the Americans normally are always keen on borrowing. In other words, when the interest rates in the market are low, more and more people are able to purchase homes for themselves. And the truth is, when people as well as businesses spend more money or more money is in circulation in the market, it denotes a healthy and buoyant economy.
Similarly, when the interest rates drop, usually the stock market shows an upward movement. On the contrary, when the Fed increases the interest rates in the market, the stock market shows a downward movement. It may be noted that since the beginning of the 1990s, from time to time, the Fed stated increasing the interest rates by a quarter to a half point each time. The idea behind the move was to drive a hole into the 'absurdly enthusiastic' bull market that was going up at a faster pace that was beyond anyone's mind. However, it seemed that the stock market took no notice of the Fed and persisted rising ever more.
During the early phase of 2000, the market reacted to a series of interest rate hikes at last. As a result of these multiple increases in the interest rates, the NASDAQ (National Association of Securities and Dealers Automated Quotation) stated to drop initially by hundreds of points and later by thousands. The Federal Reserve System, which had so far raised the interest rates so conscientiously, now started lowering them anxiously.
Although majority of the investors are familiar with the ancient adage 'Don't fight the Fed', unlike in the past, this time they did not pay any heed to the advice. Consequently, the markets apparently did not take the activities of the Federal Reserve System into account and as a result, plunged once more. However, the lower rates on interest in the market proved to be a boon for the real estate market that began to flourish like never before and many people accepted the prospect to refinance their homes.
Anyone watching the stock market closely will agree that whenever the Fed increases or lowers the interest rates it eventually turns out to be a thing of major concern. In fact, it is possible that the market will perk up following news of a rate cut or go down on the news regarding any increase in the interest rate. It is also significant to note that on a number of occasions, the stock market moves remarkably much before the Fed has announced a decision.
In addition to what has been discussed above, you also need to learn about some more aspects regarding the Fed. As far as its official duties are concerned, the Federal Reserve System is not expected to be bothered about the happenings in the stock market. Even if you ask the board members of the Fed, they will assert that the incidents at the stock market do not have any bearing on them or their actions. However, it is common knowledge that the board members of the Fed definitely have their focus on the activities at the stock market. For instance, if the Federal Reserve System did not interfere with the recent bullish market by initiating far-reaching cuts in the interest rates, it is likely that the stock market would have plunged at a greater pace and nose dived more than it actually did. Hence, the sine qua non is that if you happen to be involved with the stock market in some way or the other, you ought to keep your mind on the actions and decisions taken by the Fed.
Whether you accept it or not, the dollar is among the most vital economic indicator. At a time when the dollar is robust vis-à-vis other currencies, such as the sterling-pound, euro or the yen, foreign investors will purchase our Treasury securities and also feel encouraged to invest in our stock market. This is always a good sign for the country's economy. However, the bad news is that when the dollar is strong, out merchandise is not preferred by the foreigners, as they become too costly for them then. In addition, when the dollar is strong against other currencies, it is also becomes expensive for foreigners to travel to the United States and, hence, the number of tourists drop.
Conversely, when the value of the dollar is plunging and it becomes weak vis-à-vis other currencies, foreign investors draw their money out of our stock market. In fact, the foreign investors suffer losses twice - once when the value of the dollar begins to fall and again when the prices in the United States stock markets drop. The dollar and the stock market are directly related and, hence, when the value of the dollar falls, the stock market also has a propensity to go down in price. At the same time, when the dollar is falling, it is not the ideal time to go abroad, as the costs of traveling overseas too become costlier. However, the only optimistic side of a falling dollar is perhaps that the foreigners are now able to buy our merchandise and services. And, such a situation is definitely pleasing for the manufacturers in the United States.
Thus, if you are in the stock market, it is essential for you to keep your focus on the potency and failing of the dollar. In case you find that the value of the dollar is plunging, like it happened in 2002, it is an indication that the foreign investor may get frightened and start taking away their money from the United States stock market, which will now being to go down. Hence, it may be time for you to consider investing your money in other profitable ventures.
In simple words, inflation denotes the rise in the prices of merchandise and services every year and, as a rule, it is mentioned in percentage. People studying economics have to come across the term 'inflation' very often. It is important to note that one of the rationales behind people generally investing in the stock market is to overcome the effects of inflation.
When there is a lot of inflation, it is not a healthy sign for the economy of the country and this is the basic reason why markets strongly detest soaring price rises. In other words, inflation means a rise in the prices of goods and services, as a result of which people acquire less for every dollar they spend. On the other hand, when there is a small inflation, it is beneficial for the consumers, as they are able to afford loans, charge purchases on their credit cards and even buy new homes in such conditions. Thus, the more amount of money the consumers pay out, the better it is for the economy of financial system of a nation.
Usually, economists or business experts are happy when the inflation remains as low as three to four per cent. Nevertheless, in 1980, inflation soared to as high as 18 per cent. Moreover, whenever the inflation soars higher, the Federal Reserve System reacts by increasing the interest rates in the market, which, in turn, contains the availability of money into the financial system. It may be mentioned that during inflation, the cost of savings, for instance, certificates of deposit (CDs) and money market accounts too goes up. This is primarily owing to the fact that when the Federal Reserve System increases the interest rates to counter inflation, the interest rates on the fixed-income investment also increases.
Among the different motivations for investing in the stock market, one is that this type of savings is a very good idea as it has been proved over the years that investments in the stock market generally offers a return of 11 per cent annually, practically overcoming the effects of inflation. At the same time, it needs to be mentioned that there is no guarantee that the stock market will be offering returns worth 11 per cent of the investment this or the following year. Conversely, if you have invested money in the stock market and find that the inflation is rising gradually, it may be a hint for you to transfer your money from the stock market to other substitute endowments to stocks, for instance, short-term Treasuries or a money market account.
It may be noted that the government can gauge if the prices of merchandise and services are going up or falling through several means. For instance, the government uses the consumer price index (CPI) to determine the changes in day-to-day costs of things like foodstuff, clothing and housing. Many people denote the CPI as the 'cost of living index' or the 'inflation number'. Thus, when the consumer price index rises, it signifies an increase in inflation. In addition, the government is able to find whether the prices of commodities, inclusive of raw materials, such as steel and aluminum, are rising or falling by using the producer price index (PPI). In the instance of the prices of raw materials are soaring, the consumers will eventually have to spend more at the supermarket as well as the gas station.
Apart from the consumer price index (CPI) and the producer price index (PPI), the U.S. government, particularly the United States Department of Labor, also releases the meticulously scrutinized joblessness or unemployment statement. It is interesting to note that the consequences of this particular report have a direct impact on the stock market. When the unemployment report is below six per cent, it means there are a lot of jobs available. On the other hand, if the unemployment report is above six per cent, it denotes that the employment market is tense and it is really difficult to get a job. It may be noted that the day on which the United States Department of Labor releases this report, the stock market responds in uncertain manners. Normally, the stock market is pleased to see that the CPI and PPI figures are at a low and a decline in unemployment.
The government also releases several other accounts that are minutely followed by the investors and merchants. For instance, the government releases the gross domestic product (GDP) report once in every three months and it gauges the amount of merchandise and services produced in the country's financial system. In fact, the GDP is a very effective, but extensive indicator of the way the financial system of the country is functioning. The GDP, like inflation, is always denoted in percentage and is a sign of how the economy of the country is developing. The higher the GDP, the greater the growth of the country's financial system. For instance, if the GDP is above three per cent, it denotes that the economy of the country is not only on the right track, but also healthy. On the other hand, if the GDP is downbeat, it means that the economy of the country is not progressing or we are facing a recession (economic slump). In fact, a negative GDP of two per cent or more quarters is a sign of recession.
Generally speaking deflation may be defined as a decline in general price levels, frequently caused by a lessening in the supply of money or credit. However, to be able to comprehend what this term means, we need to review what is denoted by inflation. Inflation may be described as a rise in the price of merchandise and services every year getting us fewer things for every dollar we spend. Conversely, deflation is an economic situation where the availability of money and credit is reduced. Inflation is quite common in the United States, but deflation is a rare occurrence here. However, Japan is an exception in this regard and has been experiencing deflation for several years now.
For the uninitiated, deflation would seem to be an advantageous situation. In such situations prices of almost everything decline as the availability of merchandise heaps up and the producers are compelled to lower the prices of commodities with a view to lure the consumer to make purchases. On the contrary, the manufacturing firms retrench staff, prices of real estate assets decline as borrowers are unable to repay the loans taken by them and the stock market too passes through a bumpy phase. During deflation, though the prices of commodities are low, very few people can afford to purchase any item. However, people who have enough money have an inclination to pass some more time with the hope that the prices of commodities will decline still more.
It is important to note that one may best utilize deflationary situation by endeavoring to clear him or herself of all the money they may owe. In other words, this denotes that you need to pay all the outstanding amounts on your credit cards, car loans as well as your mortgage. However, before you clear your outstanding mortgage amount, it is essential that you consult a tax advisor. Moreover, you need to develop the habit of saving more. If it does not occur naturally, force yourself to do it. In case there is actually a deflationary collapse, people possessing the maximum amount of cash will flourish.
Politics definitely has an impact on the stock market. Precisely speaking, the decisions and actions of President and the Congress of the United States influence the stock market immensely. Irrespective of whether it is an important communication or speech by the United States Presidential, a new law or higher taxes, the stock market's reaction largely depends on the way the Wall Street reads between the lines. In any case, the stock market is mostly based on assessment and psychology compared to actual happenings. In fact, politics is intertwined with fiscal markets in such a manner that only a political scientist is able to elucidate the entire matter.