Let’s say the economy is about to turn, Weigand (2001) calls this the first stage of the economic cycle, expectation during this stage are for positive earnings growth which have a positive impact on the stock price, interest rates are usually low during this stage of the economic cycle, the low interest rates pushes investors from low yielding bonds to the stock market which in turn pushes the stock prices up, I would compare this period to late 2009 in Kenya when the economy was emerging from the post-election violence (PEV) and the Global financial crisis (GFC).



The second stage according to Weigand (2001) the economy continues to grow and there is increased capital demand, banks lend more just like we have seen during most of 2010 in Kenya this results in increased inflationary pressure and interest rates begin to rise slowly, expectations of higher earnings are high and this overshadow the rising yields on T-bills, overall the effect on stock prices is positive and prices at the stock market hit the roof like in 2010 when the Nairobi Stock Exchange closed with a 36% gain and banks reported super profits due to increased capital demand.

read more http://www.contrarianinv...at-the-stock-market.html