4504c13 - Economy/Market Analysis Chapter 13 Top-down...

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Economy/Market Analysis Chapter 13 Top-down Approach o Analyze economy-stock market first then industries and finally individual companies Need to understand economic factors that affect stock prices Need to understand the current and the future state of the economy to understand what is likely to happen to the market Given the economy-market relationship then Use valuation models applied to the overall market and consider how to forecast market changes Stock market’s likely direction is of extreme importance to investors Economy and the Stock Market o Direct relationship between the two o Economic business cycle Recurring pattern of aggregate economic expansion and contraction Cycles have a common framework Trough (the beginning) - peak - trough (the ending) Since WWII—cycles have lasted on the average 50 months Current expansion is the longest peacetime expansion since March 1991 ----102 months (August 1999) and still going but may be changing Can only be neatly categorized by length and turning points in hindsight Composite Indexes of General Economic Activities Leading Increase—expansion in next 3-12 months Decrease-immediate downturn Confirmation by first the coincident and then by the lagging indicators—if not reconsider Coincident Lagging Stock Market and Business Cycle o Stock prices lead the economy Historically, the most sensitive indicator Stock prices consistently turn before the economy o How reliable is the relationship? The ability of the market to predict recoveries is much better than its ability to predict recessions Expansions typically end for one of the following reasons: 07/09/2011----1
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Overheating of the economy with rising inflation (Fed comes in to control) External shock—such as sharp rise in oril prices or a financial crash following a break in an speculative bubble Stock Market and the Bond Market With the introduction of mortgage-backed securities and derivatives, increase
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This note was uploaded on 07/09/2011 for the course FIN 4504 taught by Professor Banko during the Summer '08 term at University of Florida.

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4504c13 - Economy/Market Analysis Chapter 13 Top-down...

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