mutual investment club of cornell week 3: macroeconomics sept. 22, 2011

Mutual Investment Club of Cornell

Week 3: Macroeconomics

Sept. 22, 2011


What’s the end goal here?

Read and interpret economic news Understand how economic trends

impact investment decisions


Where are we going?

Macro stats to keep any eye on The Business Cycle Fiscal Policy Monetary Policy/ The Fed A few case studies


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.


The Impact of Macro


Expectations

Expectations matter! Markets move when news deviates from

expectations Especially important for macro Example:

Expectations of unemployment


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


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.


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.


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.


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.


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


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


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


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


How the Fed Operates

The Fed is entrusted with a “dual mandate.” Their goal is to maintain “full employment” and “price stability.”


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?


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


Kraft Foods vs the Market


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?


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)


Caterpillar vs the Market


Exxon Mobil vs. Oil


Tata Motors

Today’s pitch What is the macro impact? Stay tuned for our contribution to the

pitch!


Questions?

Thanks for coming!

mutual investment club of cornell week 3: macroeconomics sept. 22, 2011

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