ASALAM U ALIKUM

CHAPTER 12
Macroanalysis and Microvaluation
of the Stock Market
 Group Members
 M KHUBAIB (01)
 ASAD ULLAH (23)
 FAWAD SAIF (54)
 MALIK MUJAHID (11)
 SAMEED AKBAR (15-54)
 CONTENT
 Components of Macro analysis (01)
 MACROANALYSIS (01)
 Macro Market (01)
 Economic Activity and Security Market (23)
 Economic series and Stock Prices (23)
 Cyclical Indicator Approach (54)
 Monetary Variables, the Economy, and Stock
Prices (11)
  Inflation, Interest Rates, and Security Prices (15-
54)
 The components of Market
Analysis
 The Macro analysis of the Relationship between
the aggregate securities Markets and the
aggregate Economy
 The specific Micro valuation of the stock market
 Macro analysis
 The macro analysis is in response to the belief
that security markets reflect what is expected to
go on the economy, because the value an
investment is determined by its expected cash
flows and its expected required rate of return.
 Clearly both of this valuations factors are
influenced by the aggregate economic
environment
 MACROMARKET ANALYSIS
 Fluctuations in security markets are related to
changes in expectations for the aggregate economy.
 The prices of government and corporate bonds are
determined by the level of interests rates which is
influenced by overall economic activity and Federal
Reserve policy. Aggregate stock prices reflect
investor expectations about corporate performance
in terms of earnings, cash flows and required rate of
return by investors. All of these are heavily
impacted by economic outlook.
 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
  Economic Activity and Security
Markets
 Stock Market As A Leading Indicator
–Stock prices reflect expectations of earnings,
dividends, and interest rates
–Stock market reacts to various leading indicator
series
–Stock prices consistently turn before the
economy does
 Economic Series
This statistical figures, such as the consumer price
index or the gross domestic product, used by
economists to predict future economic activity.
 Stock Prices

Current price that a share of stock is trading for on

the market
 including changes within the economy as a whole,
changes within industries, political events, war,
and environmental changes
 Cyclical Indicator Approach to
Forecasting the Economy
 This approach contends that the aggregate
economy expands and contracts in discernable
periods
 National Bureau of Economic Research(NBER)
Cyclical indicator categories
–leading indicators
–coincident indicators
–lagging indicators
 Leading Indicators
Includes economic series that usually reach peaks or troughs
before corresponding peaks or troughs in aggregate economic activity
 –Treasury spread, Avg. weekly hours production workers, consumer
expectations
 Coincident indicators

Economic series that have peaks and troughs that roughly

coincide with the peaks and troughs in the business cycle
–Employment (nonagricultural), personal income, Industrial production,
manufacturing and trade sales
 Lagging indicators

Economic series that experience their peaks and troughs

after those of the aggregate economy Selected series
economic series that do not fall into one of the three
main groups
–Manufacturing and trade inventories, commercial and industrial loans
 Monetary Variables, the Economy,
and Stock Prices
 Money supply and the economy
 Declines in the rate of growth of the money supply
have introduce business decrease by an average
of 20 months Increases in the rate of growth of
the money supply have introduced economic
development by about 8 months
 Money supply and stock prices
  Other economic variables and stock prices
–growth in industrial production
–changes in the risk premium
–twists in the yield curve
–measures of unanticipated inflation
–changes in expected inflation during periods of
volatile inflation
  Inflation, Interest Rates, and
Security Prices
 Inflation and interest rates
–generally move together
–investors are not good at predicting inflation
 Inflation rates and bond prices

–negative relationship
–more effect on longer term
 Bonds Interest rates and stock prices

–not direct and not consistent

–effect varies over time
 Potential scenarios

 The positive scenario

Interest rates rise due to an increase in the rate of inflation,
and corporate earnings likewise experience an increase in
growth because firms are able to increase prices in line
with cost increases.
 Mildly negative scenario

Interest rates and the required return k increase due to

inflation, but expected cash flows continue to grow at the
prior rate assuming small increases in prices at rates
below the increase in the inflation rate and cost increases.
 Very negative scenario
Interest rates and the required return k increase due
to inflation, while the growth rate of cash flows
declines because during the period of inflation
the costs of production increase, but many firms
are not able to increase prices at all, which causes
a major decline in profit margins
THANK YOU 