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Economies and Markets A strong relationship exists between the economy and the stock market Security markets reflect what is going on in an economy because the value of an investment is determined by its expected cash flows required rate of return

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economies and markets
Economies and Markets
  • A strong relationship exists between the economy and the stock market
  • Security markets reflect what is going on in an economy because the value of an investment is determined by
    • its expected cash flows
    • required rate of return
cyclical indicator approach to forecasting the economy
Cyclical Indicator Approach to Forecasting the Economy
  • National Bureau of Economic Research (NBER)
  • Cyclical indicator categories
    • leading indicators
    • coincident indicators
    • lagging indicators
  • Composite series and ratio of series
cyclical indicator categories
Leading indicators – economic series that usually reach peaks or troughs before corresponding peaks or troughs in aggregate economy activity

Coincident indicators – economic series that have peaks and troughs that roughly coincide with the peaks and troughs in the business cycle

Cyclical Indicator Categories
monetary variables the economy and stock prices
Monetary Variables, the Economy, and Stock Prices
  • Money supply and the economy
  • Money supply and stock prices
  • Excess liquidity and stock prices
    • year to year percentage change in M2 money supply adjusted for small time deposits less the year-to-year percentage change in nominal GDP
money supply and the economy
Declines in the rate of growth of the money supply have preceded business contraction by an average of 20 months

Increases in the rate of growth of the money supply have preceded economic expansions by about 8 months

Money Supply and the Economy
structural economic changes and alternative industries
Structural Economic Changes and Alternative Industries
  • Social Influences
    • Demographics
    • Lifestyles
  • Technology
  • Politics and regulations
    • Economic reasoning
    • Fairness
    • Regulatory changes affect numerous industries
    • Regulations affect international commerce