Download Markets Rise and Markets Fall

Module 2
Markets Rise and Markets Fall
Copyright Leslie Lum
Page 1
Module 2 Learning Objectives
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Understand the cyclical nature of markets.
Define how the economy is measured.
Specify the relative position of the American economy.
Define economic growth and its relation to the business
cycle.
Explain the business cycle.
Define inflation and its role in the business cycle.
Explain the role of the Federal Reserve.
Explain the relationship of interest rates to stock market
returns.
Locate and use economic indicators to predict overall
Copyright Leslie Lum
Page 2
growth in the economy.
What determines whether
investments rise or fall?
• Those people on Wall Street.
• The alignment of the stars.
• Whether the AFC or NFC wins the
SuperBowl.
• The economy.
• It’s a crap shoot.
Copyright Leslie Lum
Page 3
Markets Rise and Markets Fall
Annual Total Return on Standard and Poor's 500 Index
50%
40%
30%
20%
10%
-10%
-20%
-30%
-40%
Source: Global Financial Data, www.globalfindata.com
Copyright Leslie Lum
Page 4
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
0%
1972
14%
19%
-15%
-26%
37%
24%
-7%
7%
19%
33%
-5%
22%
23%
6%
32%
19%
5%
17%
32%
-3%
30%
8%
10%
1%
38%
23%
33%
29%
21%
-9%
1971
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
The most important lesson
Markets Rise and Markets Fall
Annual Total Return on Standard and Poor's 500 Index
50%
40%
30%
20%
10%
-10%
-20%
-30%
-40%
Copyright Leslie Lum
Source: Global Financial Data, www.globalfindata.com
Page 5
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
0%
What is the economy?
Copyright Leslie Lum
Page 6
Part of the U.S. economy?
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Building a house in New Mexico
Toyota cars assembled in Kentucky
Hair salon in South Dakota
Charlotte Hornets
Coca Cola plant in China
Copyright Leslie Lum
Page 7
The $64,000 question--
List the top ten economies in the
world.
Copyright Leslie Lum
Page 8
#1 United States:$11,628,083,000,000.00
#2 China:$7,123,712,000,000.00
#3 Japan:$3,774,086,000,000.00
#4 India:$3,362,960,000,000.00
#5 Germany:$2,325,828,000,000.00
#6 United Kingdom:$1,832,252,000,000.00
#7 France:$1,744,352,000,000.00
#8 Italy:$1,621,372,000,000.00
#9 Brazil:$1,482,859,000,000.00
#10 Russia:$1,408,603,000,000.00
#11 Spain:$1,046,249,000,000.00
#12 Mexico:$1,014,514,000,000.00
#13 Canada:$993,079,000,000.00
#14 Korea, South:$980,694,000,000.00
#15 Indonesia:$779,719,000,000.00
#16 Australia:$605,942,000,000.00
#17 Turkey:$552,990,000,000.00
#18 Netherlands:$520,918,000,000.00
#19 Thailand:$510,268,000,000.00
#20 South Africa:$510,102,000,000.00
http://www.worldbank.org/data/quickreference/
quickref.html
Copyright Leslie Lum
Page 9
GDP per capita by country
2007
Source: Wikipedia
1929
1931
1933
1935
1937
1939
1941
1943
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
$ billions
GDP
Real GDP
(Chained 2000 dollars)
14,000.0
12,000.0
10,000.0
8,000.0
6,000.0
4,000.0
2,000.0
0.0
% change chained 2000 dollars
-5.0
-10.0
-15.0
1930
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
How fast are we growing?
Real GDP Growth
25.0
20.0
15.0
10.0
5.0
0.0
2008 data
• 2008 data
http://www.whitehouse.gov/fsbr/esbr.html
• How do we compare?
http://www.nationmaster.com/graph/eco_gdp_ppp-economy-gdpppp
Year
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Current Dollars (B)
5,986.2
6,318.9
6,642.3
7,054.3
7,400.5
7,813.2
8,318.4
8,781.5
9,274.3
9,824.6
10,082.2
10,446.2
1996 Dollars (B)
6,676.4
6,880.0
7,062.6
7,347.7
7,543.8
7,813.2
8,159.5
8,508.9
8,859.0
9,191.4
9,214.5
9,439.9
Measuring the economy
Value of goods
and services
are totaled.
GDP adjusted
for inflation.
GDP Growth Rate (1990s)
5.00%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
GDP in
GDP in billions
billions of
of chained
current dollars 1996 dollars Growth
5,803.2
6,707.9
5,986.2
6,676.4
-0.47%
6,318.9
6,880.0
3.05%
6,642.3
7,062.6
2.65%
7,054.3
7,347.7
4.04%
7,400.5
7,543.8
2.67%
7,813.2
7,813.2
3.57%
8,318.4
8,159.5
4.43%
8,781.5
8,508.9
4.28%
9,268.6
8,856.5
4.09%
9,872.9
9,224.0
4.15%
4.00%
3.00%
2.00%
1.00%
0.00%
1991
Growth is
graphed.
-1.00%
1992
1993
1994
1995
1996
1997
1998
1999
2000
The rate of change of GDP
• Growth
• Period of Expansion
• Contraction
• Recession
Inflation
• Increase in the price of goods and
services
• How do we measure it?
• Is it good or bad?
• What has been the inflation rate for the
past 30 years?
Consumer Price Index
1986
1987
1988
1989
1990
CPI
109.6
113.6
118.3
124
130.7
1991
1992
1993
1994
1995
136.2
140.3
144.5
148.2
152.4
1996
1997
1998
1999
2000
156.9
160.5
163
166.6
172.2
2001
2002
177.1
179.9
http://www.bls.gov/cpi/home.htm#tables
Inflation
1986
1987
1988
1989
1990
CPI
DEC-DEC AVERAGE
109.6
1.1
1.9
113.6
4.4
3.6
118.3
4.4
4.1
124
4.6
4.8
130.7
6.1
5.4
1991
1992
1993
1994
1995
136.2
140.3
144.5
148.2
152.4
3.1
2.9
2.7
2.7
2.5
4.2
3
3
2.6
2.8
1996
1997
1998
1999
2000
156.9
160.5
163
166.6
172.2
3.3
1.7
1.6
2.7
3.4
3
2.3
1.6
2.2
3.4
2001
2002
177.1
179.9
1.6
2.4
2.8
1.6
1914
1916
1918
1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Annual Change in Consumer Price Index
Inflation rate
20
15
10
5
0
-5
-10
Department of Labor http://www.bls.gov/data/#prices
-15
How does the US compare?
http://www.nationmaster.com/graph-T/eco_inf_rat_con_pri
Inflation Up - Interest Rates Up
16%
14%
Inflation
T-Bill Return
12%
10%
8%
6%
4%
2%
Source: Bureau of Economic Affairs and Global Financial Data
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
0%
$ billions
-100.0
-200.0
-300.0
-400.0
-500.0
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Federal spending
Annual Federal Deficit
(Revenues minus outlays per year)
300.0
200.0
100.0
0.0
Can the Government afford to help?
Deficits or surplus ($billion)
Total Federal Debt
($ trillions)
10
9
8
7
6
5
4
3
2
1
0
http://www.treasurydirect.gov/
Copyright Leslie Lum
Page 25
Growth in the Economy
Real GDP Growth - Chained 1996 Dollars
8.0%
6.0%
4.0%
2.0%
-2.0%
-4.0%
Source: Bureau of Economic Affairs, U.S. Government
Copyright Leslie Lum
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2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
0.0%
Inflation Up - Economy Down
Inflation Down - Economy Up
16%
14%
Real GDP Growth
Inflation
12%
10%
8%
6%
4%
2%
-2%
-4%
Source: Bureau of Economic Affairs, U.S. Government
Copyright Leslie Lum
Page 27
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
0%
Inflation Up - Interest Rates Up
16%
14%
Inflation
T-Bill Return
12%
10%
8%
6%
4%
2%
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
0%
Source: Bureau of Economic Affairs and Global Financial Data
Copyright Leslie Lum
Page 28
How the Federal Reserve stimulates
the economy
Copyright Leslie Lum
Page 29
When Interest Rates Rise Stock Returns Fall
Change in S&P 500 versus change in 90-day T-bill rate.
Annual % Change
80.0
Annual change in
S&P 500.
60.0
Annual change in
90-day T-bill rate.
40.0
20.0
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
0.0
-20.0
-40.0
-60.0
Source: Global Financial Data, www.globalfindata.com
Copyright Leslie Lum
Page 30
What’s the conclusion?
• The economy, inflation, interest rates and stock
market are connected.
• The economy and the market moves in cycles.
• As a shopper you buy when there are sales, but most
investors sell when there are sales. The cycles tell
you that is not smart.
• It’s important to monitor the economy to see where
the markets are headed.
• Investors need to set a plan before the market
moves. Use cycles to help you do that.
Copyright Leslie Lum
Page 31
Economic Indicators
• Gives a heads-up on what’s happening on
the economy
• Watch for trends
–
–
–
–
–
Employment
Prices
Output
Production
Income
Copyright Leslie Lum
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