Trading for Dummies® 2nd Edition

Chapter 5. Fundamentals 101: Observing Market Behavior

In This Chapter

• Exploring business cycle basics

• Rotating through sectors

• Deciphering economic indicators

You hear plenty about recession and inflation. You know both can mean bad economic news, but do you really understand what they mean and why they happen? Regardless of what the economic gurus do, the economy cycles between periods of economic growth and recession. If growth becomes overheated, periods of inflation are likely. Inflation can also be caused when the value of the currency falls. For example, when the value of the U.S. dollar falls, that causes an increase in the price of imports and commodities like oil for U.S. residents. That, in turn, impacts the price of just about every other good sold in the United States.

The Board of Governors of the Federal Reserve (Fed) oversees moves that are made in monetary policy in the United States, and the legislative and executive branches of government are responsible for tax changes and other fiscal policy moves. The actions of the Fed and the government can minimize the impact of inflation or recession and spur economic growth, but nothing can be done to erase economic cycles. Markets and traders try to anticipate these cyclical moves with an eye toward recording gains. This chapter will help you understand which economic indicators tend to lead these cycles and how you can use them to understand the current state of the markets and the economy.

The Basics of the Business Cycle ...