Jim Lee
presented to
FINA-5340 (Investment Portfolio Theory)
September 19, 2011
Overview
 Why economic fundamentals
and forecasts are important for
investment
 What and where to look for
information
 Brief survey of “how they do
that”
 What should you (the investor)
make of all the data
 Takeaway
Why Economic Fundamentals and Forecasts are
Important for Investment
 Most businesses are affected by the overall economic
conditions in the economy (taken as given)
 And so are financial markets and financial
instruments (stocks, bonds, loans etc.)
 A basic understanding of the current and future
macroeconomic performance will help you make more
informed investment decisions about companies and
their obligations
 For speculative activities: Try technical trading!
Where to look for data/information
 Investors should keep abreast of the current economy
 A typical day in the office should begin with a brief
review of news on the economy (after a quick look at
the “markets”)
 If you are a professional, you should already have
subscriptions to news alerts from the business media:
 Financial Times
 Wall Street Journal
 Fortune/Bloomberg
 Updates from major financial institutions
Or, get it for free…
What to look for
 Not all “indicators” are created the same: Some are
leading, some are lagging
 Markets react mostly to news releases (surprises) of
leading indicators (unemployment claims, consumer
confidence, manufacturers’ new orders, PPI)
 The Conference Board’s
Index of Leading Indicators
is the most popular outlook
indicator
How do they do that
 First ECON course gives you a comprehensive
understanding of basic macroeconomic concepts
(GDP, CPI, employment, etc)
 Forecasting Methods:
 Indicators (leading and lagging)
 Surveys of economists & professionals
 Structural Models (CBO, FRB)
 Time-series modeling


Extrapolation
ARIMA, ARCH/GARCH
 They are right almost 50% of the time
What to look for (in a typical outlook presentation)
 Global economic conditions
 National economic conditions
 Economic indicators/statistics
 Fed watching
 Regional conditions
 Example: Dallas Fed indicators
 Developments in industries/sectors
 Example: Oil, housing, real estate
 Local conditions (market conditions) by experts
What To Make of All the Data
 Perhaps nothing at all!
 The efficient market hypothesis implies that the
markets will (almost) immediately respond to all
publicly available information.
 … unless you see things that are different from the
consensus, i.e., surprises.
 For day traders: Try to stay ahead of everyone else,
rather than waiting to be informed.
 For Warren Buffett-type long-term investors : Trends
are persistent, the hardest part is to spot the business
cycle turning point
Pop Quiz: What can you make of this?
The Dow is highly correlated with GDP…
What If I Choose to Ignore the Economy?
“It’s the economy, stupid!”—a true story
Thank y’aw !%*#