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Week 3: Macroeconomics

Week 3: Macroeconomics. Sept. 22, 2011. What’s the end goal here?. R ead and interpret economic news Understand how economic trends impact investment decisions. Where are we going?. Macro stats to keep any eye on The Business Cycle Fiscal Policy Monetary Policy/ The Fed

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Week 3: Macroeconomics

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  1. Week 3: Macroeconomics Sept. 22, 2011

  2. What’s the end goal here? • Read and interpret economic news • Understand how economic trends impact investment decisions

  3. Where are we going? • Macro stats to keep any eye on • The Business Cycle • Fiscal Policy • Monetary Policy/ The Fed • A few case studies

  4. Why bother with the macro stuff? • Macroeconomic events have far reaching implications and can lift up or push down the entire market. • You can have a company figured out almost completely and get completely knocked off your feet by a macro event. • Any examples come to mind? • Macro analysis lets you make sector-wide recommendations.

  5. The Impact of Macro

  6. The Impact of Macro

  7. Expectations • Expectations matter! • Markets move when news deviates from expectations • Especially important for macro • Example: • Expectations of unemployment

  8. Macro stats: GDP • Gross Domestic Product (GDP) is the market value of all final goods and services made within the borders of a country in a year. • How do changes in GDP impact different sectors? • Need to examine the different components of GDP • Y = C + I + G + CA

  9. Macro Stats: Industrial Production • Industrial Production is a measure of output that focuses on manufacturing and industry. • Used to measure the resilience of the manufacturing side of the economy, specifically.

  10. Macro Stats: Unemployment Rate • The Unemployment Rate is the percentage of the labor force that is not employed. • The labor force is everybody who is employed or has sought employment in the last month. • In the U.S., unemployment is 9.1%, up from about 4.5% in 2007.

  11. Macro Stats: Inflation • Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. • A little inflation (~ 2-3%) is good for the economy, but too much is very very bad.

  12. Interest Rates • Interest Rates refer to the yearly cost of borrowing money, expressed as a percentage. • When rates are high, businesses are less willing to invest in new projects, since they can earn a better return in the market, and consumers will consume less, since they earn a higher return on their savings.

  13. The Business Cycle: Symptoms • Recessions (contractions in economic activity) will typically be accompanied by: • Falling GDP • Rising Unemployment • Lower inflation (but not always) • Lower consumer sentiment • Indeterminate effect on interest rates

  14. The Business Cycle: Causes • Demand shocks • Fiscal shocks • *Monetary policy* • Private spending • Sectoral shifting • Real shocks • Oil embargos, and the like • Notoriously hard to predict

  15. Fiscal Policy • Fiscal Policy refers to the taxing and spending decisions of the government. • Government purchases goods and services • Changes in fiscal policy may impact what and how much they buy

  16. Monetary Policy • When the Fed pumps money into the economy, it tends to lower interest rates. Lower rates mean: • More business investment • Less consumer saving • When the Fed takes money out, it tends to raise interest rates. Higher rates mean: • Less business investment • Less consumer saving

  17. How the Fed Operates • The Fed is entrusted with a “dual mandate.” Their goal is to maintain “full employment” and “price stability.”

  18. Sector Analysis • We mentioned before that we can use macroeconomic ideas to make investment decisions on a sectoral basis. • Suppose that we anticipate the economy performing worse than expected next year, but we would still like to be invested in stocks. What would we do?

  19. Defensive Stocks • We would want to look at companies whose profitability will not take as big of a hit. • Defense (revenue from government contracts) • Non-cyclical consumer goods (food, etc.) • Utilities • Health care/pharmaceuticals • We call stocks like this “defensive stocks” • Underperform on the way up • Overperform on the way down

  20. Kraft Foods vs the Market

  21. Sector Analysis • We can also use sectoral analysis on the way up. • Suppose you feel that the macroeconomy will recover over the next year, more so than current forecasts. How might you try to profit from this?

  22. Cyclical Stocks • Buy stocks in sectors whose profitability will increase more than average as the economy recovers. • Consumer cyclical (cars, appliances) • Luxury goods • Technology • Financials (sort of)

  23. Caterpillar vsthe Market

  24. Exxon Mobil vs. Oil

  25. Tata Motors • Today’s pitch • What is the macro impact? • Stay tuned for our contribution to the pitch!

  26. Questions? • Thanks for coming!

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