Consumer Spending, Corporate Profits, and the Stock Market

The consistent pattern of the demand cycle documented in chapter 7—consumer spending leads to industrial production, which leads to capital spending—encompasses more than 80% of total economic output, or GDP. That being the case, where does the stock market fit in? From a timing standpoint, are bull and bear markets closely tied to the demand cycle of the economy? Or do stock market moves result from a dizzying combination of constantly changing monetary and liquidity concerns, international issues, psychological factors, and valuation levels, with no one factor having a consistent dominant effect?

The correct answer is that although many factors—some unique to each period—affect ...

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