You could say that the current market price is really just the average of all investors’ discounted cash flows of future dividends. Each person is different – has different views of the future, different views on risk, etc… so the share price is always moving… and has risen/fallen in anticipation of any future news. When the expectation is incorrect, you might get a sudden change in the price as the market ‘discounts’ the new or changed information into the current share price.

So, let’s get back to some basic economics

The aim here is to keep it simple and to develop some basic economic concepts – some of which may help with your stock market analysis. After all, we all live in the real world, so some awareness is good.

So, the country’s reserves can be affected in several ways:

• Imports of goods and services and exports of goods and services create a positive or negative ‘gap’ in the trade account (goods) balance and the services account (services) balance.
• Some goods and services are impacted by the exchange rate. For example, South Africa is a large exporter of gold (goods and merchandise). When the gold price changes, or the exchange rate changes, affecting the price of gold, this impacts the trade account gap as well.
• Capital flows, both long term and short term, impact the reserves. (This is mainly investments into and out of the country). This is largely dependent on local interest rates. For example, low interest rates make it attractive to borrow locally – often resulting in an outflow is capital.

These statistics/figures are usually readily available in the press or online.

The above results in the reserves fluctuating over time – which in turn tends to drive the business cycle. When the country’s reserves are high, interest rates often come down, resulting in good economic growth results. On the other hand, when a country’s reserves are low, interest rates tend to go up, tightening liquidity  and slowing economic growth down. These two conditions tend to fluctuate over time.

It is particularly useful to pick up a change in the business cycle, or even start anticipating changes before or as they happen. The business cycle can change very slowly over time, and there are several indications of where the cycle is currently, as well as any future impending changes in the cycle before is happens.

As we discussed before, the stock market will often discount these changes before they happen, so as you become better at spotting changes in the business cycle, so you will become a better at anticipating changes in the stock market.

Remember, the stock market will often lead the economy. Often, the night is darkest just before dawn, so we need to look for signs of the most intense dark.

What are these indications that the business cycle is changing…?

• Unemployment – headlines might focus on things like redundancies, the “brain-drain” and the shortage of skilled manpower. When the level of employment is high and everything seems super-positive, the economy is probably getting close to a recession. When unemployment and redundancies are at their worst, the economy is probably starting to get close to the bottom and a turnaround could be expected soon.
• Interest rates – interest rates will typically be going up when the economy is near the top and coming down when the economy is near its bottom. An increase in interest rates, although an immediate indication of health, will often lead curb the economic growth as it calms inflation.
• News – It is worth keeping an eye on how the markets react to different types of news. When everything seems rosy and optimistic and everybody is bullish then it is indicative of an uptrending stock market, or bull phase. Once you see worse than expected company results coming out and the share price hardly moves down, then you know that you are either in, or nearly in, a bull market.
• Bad debts – bad debts tend to reach a peak when the economy is at its lowest, as do insolvencies.
• Consumers/customers – shops tend to seem emptier during a recession. If it suddenly seems that there are a lot of empty shops and things really seem dire, the recession is probably near its bottom.
• Sales – If you seem summer and winter sales that seem to last longer than usual, it may indicate that stores have an overstocked position, which is a sign of the beginning of a recession. Conversely, a shorter sale coming which tends to be later than often indicates that the stock levels have come down, which may imply an upturn in the near future.
• Advertising/building – the thinner the advertising pages, and the less advertising you see, might be an indication of a recession coming to an end. Similarly, as the cranes disappear on the city skyline, the indication is that the recession is almost over.
• Extreme optimism/pessimism – in short, when things are looking their worst, expect a change for the better. When things are look amazing/fantastic, expect a change for the worst.

The supply of money is controlled by the central or reserve bank changing how much lending the retail and commercial banks are allowed. Increasing the level of lending increases the supply of money. Therefore, you should expect a higher value of transactions to take place in the economy (a higher level of economic activity or growth). This in turn results in a higher level of imports relative to the level of exports, impacting the balance of payments, and lowering the reserves – resulting in a decrease in the economy over an extended period of time.

Monetary and Fiscal policy should act together. It is usually only when you start to get a change in both policies that you start anticipating changes in the trend of the stock market. Economics tends to establish the primary trend in the market – Bullish or Bearish