These are investment warning signs and red flags stock traders look out for to avoid bad investments. It enables traders to ascertain where the market is headed in the near future.
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These are investment warning signs and red flags stock traders look out for to avoid bad investments. It enables traders to ascertain where the market is headed in the near future.
Inflation, to some degree, is good for the economy, as it allows businesses to slowly raise prices and generate profits. It can also translate into higher wages over time. However, rapid or sizable gains in the inflation rate can be a killer for the economy, and inflation scares can spook stock prices as well. When prices rise dramatically, the cost of operating a business rises as well. Not all of these increased costs can be passed along to consumers, resulting in reduced profits for businesses. Periods of rising inflation also tend to lead to higher Fed interest rates and tighter labor markets, further crimping corporate profits. Once business earnings are impaired, the familiar cycle kicks in: Reduced earnings lead to declines in share prices, potentially triggering a bear market.
Although stock prices are impacted on a second-to-second basis by a number of variables, over the long run, earnings are an important factor in supporting stock prices. Every quarter, companies report earnings, and the stock market reacts to them. When earnings start to decline across the board, it can be an indicator that an economic recession lies around the corner. In an environment of slowing or declining earnings, stock market valuations also shrink, triggering a reduction in market prices. When this contraction is severe and prolonged enough, it can turn into a bear market.
Home sales are another leading economic indicator that can reflect the state of the consumer and the American economy overall. When consumers feel good about the economy and have money in their pocket, they’re more likely to make major purchases like a home. If home sales show a decline over an extended period, it can reflect a slowdown in overall American consumer spending, which is one of the major engines of the economy. Thus, when home prices decline broadly, it’s often considered a precursor to a recession and a possible bear market.