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Topic 6 - Topic 6 Economy/Market Sector/Industry Analysis...

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    Topic 6: Economy/Market, Sector/Industry Analysis Economy/Market analysis Business cycle Important determinants of aggregate stocks Using business cycle to make forecast Sector/Industry analysis Analyzing industries, Industry life cycle Categories of industry
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    Top-down Approach Analyze economy-stock market   industries   individual companies Need to understand economic factors that affect  stock prices initially 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 Should also take a global perspective because of  linkages
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    Economy and the Stock Market Direct relationship between the two Economic business cycle Recurring pattern of aggregate economic expansion and contraction Cycles have a common framework trough peak trough Can only be neatly categorized by length and turning points in hindsight
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    Business cycle The recurring patterns of expansion,  boom, contraction, and recession in an  economy
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    Stock Market and Business Cycle Stock prices lead the economy Historically, the most sensitive indicator Stock prices consistently turn before the economy How reliable is the relationship? The ability of the market to predict recoveries is much better than its ability to predict recessions
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    Macroeconomic Forecasts of the Economy How good are available forecasts? Prominent forecasters have similar  predictions and differences in accuracy are  very small Investors can use any such forecasts Does monetary activity initiated by the  FED forecast economic activity?
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