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rop-down Approach

£ Analyze economyock marke è

jndurje è jndj jdual companje
 -eed o underand economjc facor a
affec ock prjce jnjjally
 Ue aluajon model appljed o e o erall
marke and conjder ow o foreca
marke cange
 ock marke ljkely djrecjon j of exreme
jmporance o jn eor
 ould alo ake a global perpecj e
becaue of ljnkage

Economy and the Stock Market

£ ¢jrec relajonjp beween e wo

£ Economjc bujne cycle
 Recurrjng paern of aggregae economjc
expanjon and conracjon
 Cycle a e a common framework
£ roug è peak è roug
 Can only be nealy caegorjzed by leng
and urnjng pojn jn jndjg

· siness Cycle

£ -ajonal Bureau Economjc Reearc

 Monjor economjc jndjcaor

 ¢ae bujne cycle wen pojble
£ Compoje jndexe of general economjc
acj jy
 erje of leadjng, cojncjden, and laggjng
jndjcaor of economjc acj jy o ae e
au of e bujne cycle

Stock Market and · siness Cycle

£ ock prjce lead e economy

 Hjorjcally, e mo enjj e jndjcaor
 ock prjce conjenly urn before e
£ How reljable j e relajonjp?
 Te abjljy of e marke o predjc
reco erje j muc beer an j abjljy o
predjc recejon

Macroeconomic Forecasts
of the Economy
£ How good are a ajlable foreca?
 Promjnen forecaer a e jmjlar
predjcjon and djfference jn accuracy are
ery mall
£ In eor can ue any uc foreca
£ ¢oe moneary acj jy jnjjaed by e
FE¢ foreca economjc acj jy?
 Cange due o jf jn upply or demand
 Acjon of Federal Reer e jmporan


‰eading Yield C rves

£ ow relajonjp beween marke

yjeld and jme o maurjy, oldjng all
oer caracerjjc, ljke credj rjk,
£ Upward lopjng and eepenjng cur e
jmplje accelerajng economjc acj jy
£ Fla rucure jmplje a lowjng
£ In ered cur e may jmply a recejon
£ Acjon of FE¢, expecajon jmporan
Änderstanding the Stock Market

£ Marke meaured by jndex or a erage

£ Mo jndexe dejgned for parjcular
marke egmen (ex. blue cjp
£ Mo popular jndexe
 ¢owone Indurjal A erage
 P  Compoje ock Index
£ Fa ored by mo jnjujonal jn eor and
money manager

Äses of Market Meas res

£ ow ow ock jn general are dojng

a any jme
 Gj e a feel for e marke
£ ow were jn e cycle e marke j
and ed ljg on e fuure
 Ajd jn eor jn e aluajng downjde
£ Help judge o erall performance
£ Ued o calculae bea

¢eterminants of Stock Prices

£ Corporae earnjng and expeced

jnflajon affec expeced real earnjng
£ Inere rae and requjred rae of
reurn alo affeced by expeced
£ ock prjce affeced by earnjng, rae
 If economy j properjng, earnjng and
ock prjce wjll be expeced o rje

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¢eterminants of Stock Prices

£ From conan grow erjon of

¢j jdend ¢jcoun Model
£ In ere relajonjp beween jnere
rae (requjred rae of reurn and
ock prjce j no ljnear
 ¢eermjnan of jnere rae alo affec
jn eor expecajon abou fuure

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>al ing the Market

£ To apply fundamenal analyj o e

marke, ejmae are needed of
 ream of areolder benefj
£ Earnjng or dj jdend
 Requjred reurn or earnjng muljple
£ ep jn ejmajng earnjng ream
 Ejmae G¢P, corporae ale, corporae
earnjng before axe, and fjnally corporae
earnjng afer axe

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>al ing the Market

£ Te earnjng muljpljer

 More olajle an earnjng componen
£ ¢jffjcul o predjc
 Canno jmply exrapolae from pa P/E
rajo, becaue cange can and do occur
 || a erage for P  |
 P/E rajo end o be jg wen jnflajon
and jnere rae are low
£ Pu earnjng ejmae and muljpljer

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Forecasting Changes in the Market

£ ¢jffjcul o conjenly foreca e

ock marke, epecjally or erm
 EMH ae a fuure canno be predjced
baed on pa jnformajon
 Aloug marke jmjng djffjcul, ome
juajon ugge rong acjon
£ In eor end o loe more by mjjng
a bull marke an by dodgjng a bear

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Äsing the · siness Cycle
to Make Forecasts
£ Ueadjng relajonjp exj beween
ock marke prjce and economy
 Can e marke be predjced by e age
of e bujne cycle?
£ Conjder bujne cycle urnjng pojn
well jn ad ance, before ey occur
 ock oal reurn could be negaj e
(pojj e wen bujne cycle peak

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Äsing the · siness Cycle
to Make Market Forecasts
£ If jn eor can recognjze e
boomjng of e economy before j
occur, a marke rje can be predjced
 wjc jno ock, ou of ca
 A economy reco er, ock prjce may
le el off or e en decljne
 Baed on pa, e marke P/E uually rje
ju before e end of e lump

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Äsing Key >ariables to

Make Market Forecasts
£ Be known marke jndjcaor j e
prjce/earnjng rajo
 Oer jndjcaor dj jdend yjeld, earnjng
£ Problem wj key marke jndjcaor
 en are ey jgnaljng a cange?
 How reljable j e jgnal?
 How qujckly wjll e predjced cange

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FE¢ s Approach

£ Ae allocajon cange jmply e

reurn on equjy and fjxedjncome
ecurjje are relaed
£ Compare |yr. Treaury yjeld wj
e earnjng yjeld (E/P on e P 
 E/P > (< Tnoe yjeld jmplje ock are
aracj e (unaracj e relaj ely
£ Problem Uoe reljabjljy wen rae
low, earnjng ejmaed jno fuure

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Concl sions

£ Marke foreca are no eay, and are

ubjec o error
 In eor ould coun on e unexpeced
£ Inelljgen and ueful foreca of e
marke can be made a cerajn jme,
a lea a o e ljkely djrecjon of e

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