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Three Basic Premises to Assess the Market

By Matthew Kerkhoff

 

Every business cycle and market cycle is different, but avid market watchers understand a few basic premises that generally keep them on the right side of the market. We can apply these to the current environment.

 

First, bear markets typically accompany recessions. In fact, they discount them. In the long-run, stock prices are highly correlated with corporate earnings. A share of stock is simply a share in the future profits of a company, and when earnings are expected to decline, share prices immediately reflect that perception.

 

Second, recessions don’t come out of the blue. There are many telltale signs of a recession approaching. We nearly always see developments such as a sustained rise in jobless claims, a slowdown in hiring, declines in hours worked, cutbacks on spending and new orders, slowdowns in building permits, changes in the yield curve etc.

 

Third, the Fed often plays a role in cultivating the onset of ... Log in or subscribe to continue reading.


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