investments- chapter 12

national economic enviroment

crucial determinate of industry performance, harder for businesses to succeed in a contracting economy

exchange rate

rate at which domestic currency can be converted into foreign currency

gross domestic product

market value of goods and services produced over period of time

unemployment rate

ratio of number of unemployed to total labor force

inflation

rate at which general level of prices for goods and services is rising

interest rates

high interest rates reduce present value of future cash flows

budget deficit

government spending in excess of government revenues

sentiment

consumer optimism/pessimism

fundamental factors of interest rates

1. supply of funds from savers, 2. demand for funds from borrowers, 3. governments net supply/demand for funds, modified by fed reserve 4. expected rate of inflation

demand shock

event that affects demand for goods and services in economy

supply shock

event that influences production capacity and costs in economy

fiscal policy

use of government spending and taxing for stabilizing the economy

monetary policy

actions taken by board of governors of federal reserve system to influence money supply/interest rates

supply side policies

address productive capacity of economy, goal is to induce worker/owners to produce goods

business cycles

recurring cycles of recession and recovery

peak

transition from end of expansion to start of contraction

trough

transition point between recession and recovery

cyclical industries

industries with above average sensitivity to state of economy

defensive industries

industries with below average sensitivity to state of economy

advance of economy

economic series that tend to rise or fall ____ average weakly hours of production, initial claims for unemployment insurance, manufacturers new orders, new orders for nondefense capital goods

tandem with economy

economic series that tend to ____ employees on nonagricultural payrolls, personal income less transfer payments, industrial production, manufacturing and trade sales

behind the economy

economic series that tend to rise or fall_____ average duration of unemployment, ratio of trade inventories to sales, change in index of labor costs per unit of output, average prime rate charged by banks, commercial loans outstanding, credit outstanding, change in price for services

NAICS codes

classification of firms into industry groups using numerical codes to identify industries

sensitivity to business cycle

sensitivity of sales, operating leverage, financial leverage

sector rotation

shifting portfolio into industry sectors expected to outperform

contraction

health care, consumer staples, utilities, financials

expansion

energy, industrials, materials, consumer discretionary, technology

start up stage

often characterized by new technology/product

consolidation stage

industry leaders begin to emerge

maturity stage

product potential for use by consumers

relative decline

may grow less than rest of economy or shrink

threat of entry

new entrants to industry pressure price/profits

rivalry

market share competition pressures price/profits

pressure from substitute

firms in related industries can threaten market share