Unit 6 - Economic Cycle

The research department of an investment advisory firm forecasts that the current business cycle should reach its peak within the next two months. Under such circumstances, which of the following portfolio adjustments would be most suitable for the firm's customers who actively invest in common stocks? A) Defensive stocks B) Corporate bonds C) Cyclical stocks D) Aggressive growth stocks

A) Defensive stocks RATIONAL: Peak = highest inflation, GDP, interest rates, lowest unemployment If you know these things will be happening, the best option would be to use sector rotation to move assets into those sectors that will benefit best during this cycle such as food, pharma, etc.

When investors tend to increase their investments in debt securities on the short end of the spectrum it generally leads to....

An positive yield curve By them buying into ST rather than LT debt will have the effect of driving the prices of the ST debt instruments up this driving their yields down In turn, this produces a positive yield curve

A frequently used metric by analysts is the yield, or credit, spread. What is a common method of doing this?

By comparing two bonds to each other Most commonly: - bonds with similar quality and different maturities or, - bonds with different quality and similar maturities

Yield curve

Examines U.S Treasury securities Illustrates yield per maturity Good indication of interest rate changes or where they are at, or going Does technically also include corporate bonds

Yield Spread

PART OF the yield curve A measurement used to evaluate attitudes regarding future economic conditions is the difference in yields b/n U.S treasury bonds and corporate bonds

Cyclical stocks

Shares of companies whos performance depends on the economy They do well when the economy is strong and people spend more, but decline during economic downturns EXAMPLES: - travel, cars, luxury goods

What is inertial inflation?

When prices tend to increase at a steady rate until the system receives an economic shock They rise slowly then begin to pick up steam as a result of some economic shock An economic condition where the rate of price increases reaches a stable equilibrium and stays there until a shock to the system occurs, this triggers a change in inflation rate

When businesses are operating their lowest capacity levels...

this signs that the economic cycle is in a trough