Investors are well advised to become knowledgeable about economic concepts and possible triggers that can bring changes in direction between expansions and recessions. Three desirable economic goals are full employment, stable prices, and reasonable economic growth. When unemployment is relatively low, as it is currently, individuals become more confident about the stability of their incomes and are willing to spend money on goods and services, and to increase their consumer debt to make these purchases. This translates into revenue increases and potentially earnings increases for businesses, and therefore rising security prices. The national unemployment rate and the average hourly earnings figures indicate potential problems.
Stable prices result in low inflation, which has been historically favorable to stock prices.
The rate at which economic growth occurs also impacts inflation. Moderate economic growth generally accompanies rising stock prices as companies increase revenues and earnings. However, an economy that expands too rapidly increases pressure on the potential for inflation. This is closely monitored by the Federal Reserve Board, which may take one or more actions to slow down economic growth. One of the methods used by the Federal Reserve Board is to increase or decrease the rate of interest charged to banks when they borrow from the Federal Reserve or other banks.