effect on stock prices, as higher interest rates battle against stronger cor-
porate profits. Higher inflation is bad for both the stock and bond mar-
kets. Central bank easing is very positive for stocks and has historically
sparked some of the strongest stock rallies.
Although the most important monthly report for the markets is
usually the employment data, the focus of traders constantly shifts. In
the 1970s, inflation announcements took center stage, but after Fed
chairman Paul Volcker shifted the focus to monetary aggregates, the
Thursday afternoon money supply announcements captured the atten-
tion of traders. Later, in the 1980s when the dollar soared, trade statistics
were given top billing. Employment and inflation reports are always im-
portant to the markets, and the central banks’ reaction to these data is
probably the most important factor that impacts markets.
In the end it should be noted that this chapter focuses on the short-
run reaction of financial markets to economic data. Although it is fascinat-
ing to observe and understand the market’s reaction, investing on the
basis of these releases is a tricky game that is best left to speculators who
can stomach the short-term volatility. Most investors will do well to watch
from the sidelines and stick to an investment strategy for the long run.
248 PART 3 How the Economic Environment Impacts Stocks