The Effect of Monetary Policy on the Stock and Bond Markets
The stock and bond markets are affected by fundamental economic relationships, by technical phenomena of supply and demand, and by the psychology, or mood, of the investing public. Some analysts focus on the fundamentals, while some focus on the technical aspects of the markets. The psychology, or mood of the investing public are probably the hardest aspect for analysts to understand or forecast.
The Federal Reserve affects fundamental economic relationships as well as the technical phenomena of supply and demand for investable funds. The Federal Reserve's influence flows primarily through its impact on the money supply and interest rates. The Fed also impacts on the psychology or moods of the investing public by affecting investor confidence. The Fed, through its public statements and through its actions, also impacts crucially on the public's expectations about interest rates, inflation, economic growth, and the stability of the economic and financial systems.
Fundamental analysis involves recognizing the basic financial and economic variables about markets or about a company, and attempting to determine values (i.e., stock prices, bond prices, index values, etc.) based on these facts. The fundamental economic variables that affect the market as a whole include GNP growth, inflation, employment levels, personal income, aggregate sales (e.g. retail sales, auto sales, etc.), business pur-