How Does The Stock Market Work?

Here are two question I get all the time:

“When will this horrible bear market end?” and “When will a new bull market begin?”.

To set the record straight, I will now reveal exactly when these two events will occur. But before I do I must first explain how the stock market works.

The markets are driven by three economic factors: interest rates, company earnings, and inflation.

In a healthy economy you want to see low interest rates so folks can borrow to expand a business or buy a home. You want companies making profits quarter after quarter. Finally you want inflation down so your money is not erroding. This is where we want to be. Stocks will soar under these conditions.

Now lets examine where we are now. Company earnings are dropping, inflation is dropping, and interest rates are rising. We still have a long way to go. Before we can get to the ideal scenario above the markets have to go through a process. It is a process that has always been repeated as the markets go through their cycles.

So how does the stock market work? For the current bear market to end we want to continue to see  earnings dropping. So we are on the right path here. We then need to see inflation. Yep, inflation has to rear it’s ugly head. What the government is doing by spending trillions is to create inflation. This may take six months (btw, good to be in gold during inflation) or more. Once inflation starts rising we then want to see interest rates drop. Once all three cycles are in order the bear will go off to hibernate.

But all is not perfect yet. We now need to get a bull market off and running and that catalyst for that is company earnings. Once company earnings stop dropping and begin to grow, a new bull market is starting.

As you see, we need to get inflation up, get companies to start making profits, and get interest down.

The final step in the process now that we have companies profiting, interest rates dropping, is to get inflation to drop. When inflation stops or drops, people’s income will go even further and that kicks the bull market into full gear and prosperous times again.

If you have ever wondered “How does the stock market work?” and “When will this mess be over?” now you will know based on the economy.

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