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Week 3: Macroeconomics

This week’s focus is on macroeconomics and its significance in shaping investment decisions. We'll explore key macroeconomic indicators like GDP, unemployment, inflation, and interest rates. Understanding the business cycle, fiscal policy, and monetary policy is vital for predicting market movements. Macroeconomic trends can greatly influence sector performance and stock investments. We will also discuss the importance of market expectations and how they affect investor behavior. By analyzing macro data, investors can make informed decisions and adjust strategies to mitigate risks.

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Week 3: Macroeconomics

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Presentation Transcript

  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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