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Principles of Investing FIN 330

Principles of Investing FIN 330. Chapter 5 Economic Activity. STUDENT LEARNING OBJECTIVES. Importance of Top-Down Analyses Gauging the impact of Fiscal and Monetary Policy Importance of the Business Cycle, Cyclical Indicators Components of Industry Analysis. Top-Down Analysis .

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Principles of Investing FIN 330

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  1. Principles of InvestingFIN 330 Chapter 5 Economic Activity

  2. STUDENT LEARNING OBJECTIVES • Importance of Top-Down Analyses • Gauging the impact of Fiscal and Monetary Policy • Importance of the Business Cycle, Cyclical Indicators • Components of Industry Analysis

  3. Top-Down Analysis • Economic Analysis: Macro-environment affecting performance and value • Industry Analysis: Nature of Competition, Regulatory impact, Life cycle • Company Analysis: Operating performance, Management, R&D strength

  4. Gauging impact of Fiscal and Monetary Policy • Federal Reserve Objectives • Stable prices (fighting inflation) • Support economic growth • Support full employment • Impact of Monetary Policy (see Figure 5-5) • Supply of credit (bank reserve requirements) • Cost of credit (interest rates)

  5. Gauging impact of Fiscal and Monetary Policy C. Impact of Fiscal Policy: taxes (domestic & foreign) • Deficit spending: expand public demand to spur output of capital goods • Output of capital goods expands employment and income • Expanding employment and income should expand demand for consumer goods, etc

  6. Business Cycles and Cyclical Indicators • Business cycle (see Table 5-2) • Recurrent sequences of expansions and contractions around long term economic growth • Stock prices may lead business cycles • Inflation inversely affects stock prices • Industries vary in business cycle response

  7. Business Cycles and Cyclical Indicators B. Economic Indicators (see Table 5-4) • Leading (10) : Stock prices, average hours, unemployment claims, new orders • Coincident (4): Non-agri employees, personal income, industrial production, sales • Lagging (7): duration of unemployment, Mfr. inventory to sales ratios, CPI for services

  8. Business Cycles and Cyclical Indicators C. Business Cycles and Interest Rates • Interest rate behavior related to business cycles • Yield spread: difference in yield between two securities • typically widens prior to downturns • typically narrows prior to upturns • What happens depends on risk perceptions

  9. Stock Prices and Economic Variables • Impact of changes in the money supply • Monetarist View: if Ms > Md, then people will buy financial assets (liquidity effect) • Indirect Effects of Ms > Md; increase consumption, increase sales → profits → dividends • GDP, Stock Prices, and Corporate profits are positively correlated (See Figure 5-10)

  10. Homework • Discussion Questions: 3, 4, 5 • What is the beige Book? How is it useful in our analysis? www.federalreserve.gov

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