Economics 101

The stock market is a forward-looking mechanism. Unfortunately, many investors time their entry into and out of the markets at completely the wrong time.
Many investors are surprised that stock prices hit their lows in March of this year while the economy was in shambles and in the heart of the recession; stocks rebounded nicely since March, but the economy continued to falter. It should not really be a surprise at all that the stock market rose while the economy suffered.
Stocks are a leading indicator and are consistently around six months ahead of the current economic condition. A great example of this was back in late (December) 2007 when stock prices began to decline. This was a full six months before the economic recession actually arrived. Everything seemed just fine at the time; however, in reality, late 2007 was the ideal time to be selling your stock positions and possibly begin shorting if you wanted to be more aggressive. This would have kept you out of stocks during the stock market crash of 2008!
The signs were not purely economic as there were also fundamental factors such as the bank credit crisis and declining earnings. There were also technical indicators such as a death cross in the moving averages that foretold the pending doom.
The point is: In trading, you need to understand economics first, worry less about today and more about what is just around the corner! If the economy stabilizes and everything is great and that is when you finally begin to buy stocks, then you have it all backwards. Buy when others are fearful and sell when others are greedy! This one principle helped me to pay off my first home in less than 4 years.

I have posted some of the important economic conditions to watch out for, keep in mind its not where we are today but where we are headed. This principle is why I have bought more precious metal (Gold and Silver) and commodity (Oil and Agricultural) stocks in the past few months than I have ever done previously in my life. Those assets will rise sharply in an inflationary environment and although inflation is not a problem today, it will be soon enough!

Recession
In economics, a recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way.
Fall: Production as measured by GDP (Gross Domestic Product), employment, investment spending, capacity utilization, household incomes, business profits and inflation.
Rise: Bankruptcies and the unemployment rate.Governments usually respond to recessions by adopting expansionary macroeconomic policies.
E.g., increase money supply, increase government spending and decrease taxation

Depression
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen as part of a normal business cycle. Considered a rare and extreme form of recession. Characterized by its length, and by abnormal increases in unemployment, falls in the availability of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuation (mostly devaluations) Price deflation, financial crisis and bank failures are also common elements of a depression

Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy
A chief measure of price inflation is the inflation rate. The annualized percentage change in a general price index (normally the Consumer Price Index, or CPI) over time

Stagnation
Economic stagnation, often called simply stagnation, is a prolonged period of slow economic growth. Traditionally measured in terms of the GDP growth. The definition of “slow” Under some definitions, “slow” means significantly slower than potential growth as estimated by experts in macroeconomics. Under other definitions, growth less than 2-3% per year is a sign of stagnation. The term bears negative connotations, but slow economic growth is not always the fault of economic policymakers. E.g., potential growth may be slowed down by catastrophic or demographic reasons

Stagflation
Stagflation is an economic situation in which both inflation and economic stagnation occur simultaneously and remain unchecked for a significant period of time.Economists offer two principal explanations for why stagflation occurs.First, stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable.This type of stagflation presents a policy dilemma because most actions to assist with fighting inflation worsen economic stagnation and vice versa.Second, both stagnation and inflation can result from inappropriate macroeconomic policies.E.g., central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets. Together, these factors can cause stagflation.