Top-Down Market Analysis and Economic Indicators

Flashcards covering Chapter 9 concepts including top-down market analysis, leading/coincident/lagging economic indicators, sentiment surveys, and interest rate policies.

Macroanalysis (Top-Down Approach)

The first stage of top-down market analysis, examining the relationship between aggregate securities markets and the overall economy.

Leading Indicators

Economic time series that usually reach peaks or troughs before corresponding peaks or troughs in aggregate economic activity.

Coincident Indicators

Four economic time series that have peaks or troughs that roughly coincide with the peaks and troughs in the business cycle.

Lagging Indicators

Seven economic time series that experience their peaks and troughs after those of the aggregate economy.

Leading Economic Indicators Table

A Conference Board table displaying the ten components of the Leading Economic Index and their corresponding factor weights.

Coincident Economic Indicators Table

A Conference Board table listing the four components of the Coincident Economic Index and their respective factor weights.

Lagging Economic Indicators Table

A Conference Board table detailing the seven components of the Lagging Economic Index alongside their factor weights.

GDP Prediction Problems

Three limitations of using GDP to predict stock prices: preliminary data is delayed by about $1$ month post-quarter, data is subject to revision, and stock markets lead the economy.

Economic Indicator Limitations

Three limitations discussed by Koenig and Emery (1991) and acknowledged by The Conference Board: false signals, timeliness of data and revisions, and unrepresented economic sectors.

Consumer Spending GDP Share

Consumer spending accounts for approximately 70\text{\null}\% of gross domestic product, making consumer confidence crucial near cyclical turning points.

University of Michigan Consumer Sentiment Index

A widely followed monthly survey used to measure consumer expectations and confidence regarding business and economic conditions.

The Conference Board Consumer Confidence Index

One of two primary monthly sentiment and expectations surveys used to gauge consumer willingness to spend near economic turning points.

Natural Rate (Neutral Rate)

The federal funds rate level that is neither stimulative nor restrictive to economic growth.

Accommodative Policy

Federal Reserve monetary policy designed to lower rates and increase economic growth.

Restrictive Policy

Federal Reserve monetary policy designed to slow the economy to control inflation, which is generally not beneficial to stock prices.

Interest Rate Tracking Measures

Four interest rate approaches used to monitor the economy: real federal funds rate, yield curve (term spread), Treasury vs. BBB bond risk premium, and the Fed model.

Highest Weighted LEI Component

Average weekly hours, manufacturing, which possesses the highest factor weight ($0.2373$) in the Leading Economic Index.

Lowest Weighted LEI Component

Average weekly initial claims for unemployment insurance, carrying the lowest factor weight ($0.0140$) in the Leading Economic Index.

Highest Weighted Coincident Indicator Component

Employees on nonagricultural payrolls, which carries the largest factor weight ($0.3230$) in the Coincident Economic Index.

Highest Weighted Lagging Indicator Component

Average prime rate, holding the highest factor weight ($0.3318$) in the Lagging Economic Index.