Chapter

Macroeconomic and
12 Industry Analysis

Bodie, Kane, and Marcus

Essentials of Investments
Eleventh Edition
 12.1 Global Economy
• National Economic Environment
• Crucial determinant of industry performance

• Exchange Rate
• Rate at which domestic currency can be
converted into foreign currency

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 Table 12.1: 2016 Stock Market Return (%)

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 Figure 12.1 Change in Real Exchange Rate
U.S. Dollar vs. Major Currencies, 2003-2016

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 12.2 The Domestic Macroeconomy

• Gross Domestic Product (GDP)

• 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

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 12.2 The Domestic Macroeconomy
• 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

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 Figure 12.2 S&P 500 Index versus Earnings per Share

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 12.3 Interest Rates
• Fundamental Factors of Interest Rates
• Supply of funds from savers
• Demand for funds from borrowers
• Government’s net supply/demand for funds,
modified by Federal Reserve
• Expected rate of inflation

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Figure 12.3 Determination of Equilibrium Real Rate of Interest

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 12.4 Demand and Supply Shocks
• Demand Shock
• Event that affects demand for goods and
services in economy
• Supply Shock
• Event that influences production capacity and
costs in economy

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 12.5 Federal Government Policy

Policy Description

Use of government spending and taxing for

Fiscal Policy
stabilizing economy

Actions taken by Board of Governors of Federal

Monetary Policy Reserve System to influence money supply/interest
rates

Address productive capacity of economy, goal is to

Supply-Side Policies
induce workers/owners to produce goods

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 12.6 Business Cycles
• 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

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 Figure 12.11 Stylized Depiction of Business Cycle

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 12.6 Business Cycles
• Cyclical Industries
• Industries with above-average sensitivity to state
of economy
• Defensive Industries
• Industries with below-average sensitivity to state
of economy

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 Figure 12.4 Leading and Coincident Indicators

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 12.6 Business Cycles: Leading Indicators
• Economic series that tend to rise or fall in
advance of rest of the economy
• Average weekly hours of production workers

• Initial claims for unemployment insurance

• Manufacturers’ new orders

• Institute of Supply Management Index of New Orders

• New orders for nondefense capital goods

• New private housing units authorized by local building permits

• Yield curve: spread between 10-year T-bond yield and federal funds rate

• Stock prices, 500 common stocks

• Money supply (M2) growth rate

• Index of consumer expectations for business conditions

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 12.6 Business Cycles: Coincident Indicators
• Economic series that tend to rise or fall in
tandem with the rest of the economy
• Employees on nonagricultural payrolls

• Personal income less transfer payments

• Industrial production

• Manufacturing and trade sales

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 12.6 Business Cycles: Lagging Indicators
• Economic series that tend to rise or fall behind
the rest of the economy
• Average duration of unemployment

• Ratio of trade inventories to sales

• Change in index of labor cost per unit of output

• Average prime rate charged by banks

• Commercial and industrial loans outstanding

• Ratio of consumer installment credit outstanding to personal income

• Change in consumer price index for services

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 Figure 12.5 Economic Calendar

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 Figure 12.6 Economic Calendar at Yahoo!

Time Briefing Market

Date (ET) Statistic For Actual Forecast Expects Prior
Nov 12 7:00 AM MBA Mortgage Index 11/08 -0.9% NA NA NA
Nov 12 10:00 AM Wholesale Inventories Sep 0.3% -0.1% 0.2% 0.6%
Nov 13 8:30 AM Initial Claims 11/08 290K 285K 280K 278K
Nov 13 8:30 AM Continuing Claims 11/01 2392K 2350K 2353K 2356K
Nov 13 10:00 AM JOLTS – Job Openings Sep 4.735M NA NA 4.853M
Nov 13 10:30 AM Natural Gas Inventories 11/08 - NA NA 91 bcf
Nov 13 11:00 AM Crude Inventories 11/08 -1.735M NA NA 0.460M
Nov 13 2:00 PM Treasury Budget Oct - -$122.0B -$122.0B -$90.6B

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 12.7 Industry Analysis
• Defining an Industry
• NAICS codes
• Classification of firms into industry groups
using numerical codes to identify industries
• Sensitivity to the Business Cycle
• Sensitivity of sales
• Operating leverage
• Financial leverage

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 Table 12.5 Examples of NAICS Industry Codes

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 Figure 12.6 Return on Equity, 2016

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 Figure 12.7 Industry Stock Price Performance, 2016
Electric utilities
Biotech
Money center banks
Integrated oil & gas
Heavy construction
Computer systems
Auto manufacturers
Health care plans
Tobacco
Trucking
Application software
Railroads
Aerospace/defense
Lodging
Asset management
Chemical products
Pharmaceuticals
Business software
Home improvement
Food products
Restaurants
Telecom services
Major airlines
0 10 20 30 40 50 60 70 80 90
Rate of return (%)

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 Industry Stock Price Performance, 2013 vs 2016

2013 2016

Electric utilities
Money center banks
Heavy construction
Auto manufacturers
Tobacco
Application software
Aerospace/defense
Asset management
Pharmaceuticals
Home improvement
Restaurants
Major airlines
-10 10 30 50 70 90
Rate of return (%)

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 Figure 12.9 ROE of Application Software Firms

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 Figure 12.9 Industry Cyclicality

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 Figure 12.10 Business Cycle

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 12.7 Industry Analysis
• Sector Rotation
• Shifting portfolio into industry sectors expected to
outperform
• Based on macroeconomic forecasts
• After peak, defensive industries often better performers
• In trough, capital goods industries often better performers
• In expansion, cyclical industries often better

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 Figure 12.11 Sector Rotation

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 12.7 Industry Analysis
• Industry Life Cycles:
• Start-up stage: Often characterized by new
technology/product
• Consolidation stage: Industry leaders begin to
emerge
• Maturity stage: Product reaches potential for use
by consumers
• Relative decline: May grow less than rest of
economy or shrink

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 Figure 12.12 Industry Life Cycle

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 12.7 Industry Analysis
• Industry Structure and Performance
• Threat of entry: New entrants to industry
pressure price/profits
• Rivalry between existing competitors: Market
share competition pressures price/profits
• Pressure from substitute products: Firms in
related industries can threaten market share

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 12.7 Industry Analysis
• Industry Structure and Performance
• Bargaining power of buyers
• Large-scale buyers have considerable
bargaining power
• Bargaining power of suppliers
• Large-scale suppliers have considerable
bargaining power

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 Appendix A: Table 12.3 Economic Calendar

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