Security Analysis :

Economy /Market
Analysis
By,
Laela Susdiani, SE, M.Com(App.Fin)

Security Analysis
Fundamental Analysis

- Economy/Market analysis
- Industries analysis
- Company analysis
Technical Analysis

The Economy and The Stock Market

If the economy is doing badly, most
companies will also be performing poorly, as
will the stock market. Conversely, if the
economy is prospering, most companies will
also be doing well, and the stock market will
reflect this economic strenght

Economy as Business
Cycle
Business cycle is the recurring patterns of
expansion, boom, contraction, and recession
in the economy

The Stock Market and

The Business Cycles
Stock prices generally lead the economy. The
market and the economy are closely related,
but stock prices tend to almost always turn
before the economy

How Reliable is the relationship

between the stock market and the
business cycle
The ability of the market to predict recoveries
is much better than is ability with recession

The Relationship Between The Bond

Market and The Stock Market
Bond investors react to daily information
about the economy, and the stock market, in
turn, is affected

Macroeconomic
Forecasts of The Economy
Good economic forecasts are of obvious
significant value to investors. Since the
economic and market are closely related,
good forecast of macroeconomic variables
would be very useful.

Uses of Market Measures

Market measures tell investors how all stocks
in general are doing at any time or give them
a feel for the market. Many investors are
encouraged to invest if stocks are moving
upward, whereas downward trends may
encourage some to liquidate their holdings
and invest in money market assets or funds

The Determinants of Stock Prices

Fiscal Policy
Monetary Policy
The corporate tax rate

Potential Output Of The

Economy Affect Three Changes
In The Economy
Total spending
Price level
Real money

These three changes ultimately affect

Corporate earnings
Interest rate

Corporate Earnings,
Interest Rate and Stock Prices
If the economy is prospering, investors will

expect corporate earnings and dividends to

rise and other things being equal, stock prices
to rise.
If the interest rate fall, stock prices rise and if
the interest rate rise, stock prices fall

Valuing The Market

Using a multiplier or P/E Ratio
Po = D 1 / k g
Po = (Po/E1 ) x E1
Where
Po = Stock prices
E1 = Expected earnings
D1 = Expected divedends
k = Discount rate or required rate of return
g = Expected growth rate in divedend or earnings

Forecasting Changes In The Market

Using The business cycle
Using Key Variables To make market forecasts
Using Valuation Models