One day the market is reeling from concerns that inflation is increasing. Those concerns are calmed only to find the market worried about corporate profits. Stocks and bonds can be significantly impacted by three statistics - interest rates, inflation, and corporate profits. Typically, stocks may fall because of disappointing earnings and bonds can rally in anticipation of falling interest rates. Toward the end of a recession, interest rates, corporate profits, and inflation are all falling.
Stocks can typically start to rise as investors anticipate an economic recovery.
At the beginning of an expansion, interest rates are still falling, corporate profits start to rise, and inflation continues to decline. This is generally a good time for stocks, as evidenced by the situation in the United States for the past several years. As the expansion ages, interest rates start to rise, corporate profits continue to increase, but there is now concern about inflation. Stocks may continue to do well until fears of a downturn set in. The reason so much attention is being paid to inflation now is because there is concern that we may be heading toward recession.