DERSTAND ECONOMIC CYCLE Business cycles refer to fluctuations in business activity within an economy cover time. The natural ebb and flow of the economy results in peaks ' (expansions) and valleys (contractions). i * Expansions are good for the economy because they result in increased : consumer spending, employment, production, sales, and incomes. Contractions (recessions) are bad for the economy because they result in decreased consumer spending, employment, production, sales, and incomes. 4 Common Phases of the Economic Cycle EXPANSION PEAK Economic growth Economy generates growth expectations rise SECTORS TO WATCH: SECTORS TO WATCH: Consumer Discretionary Haniel - ace Materials =< RECESSION Stocks gain momentum Stock prices are likely to fall SECTORS TO WATCH: Utilities -PEER Te) Cea Te IN 15 MINS The transaction of Production A, INCOME sok Income AL A EXPENSE _ sapere ua She can spend She can spend 1500$ 500$ The more someone spends. The less someone spends, oo Sis? __s23|| the more someone else carns. the less someone alge ears. Honthly debt- 500¢ RECESSION... + SUPPLY ~ SUPPLY We can petit irae em Revenues ‘W —DEHAND © DEMAND Employment Wo =LOWPrices = HIGH Prices usd 3 Sale of assets A, as Emotional > Cli In times of drought in F A , Source: Kotara, (2022) agricultural producing countries... Podcast [EK]ATAU Rc ‘Once we have a grasp of the broader economic picture, we can predict when a recession is likely to occur. When the Federal Reserve tightens monetary policy, it often affects financial assets such as stocks. Therefore, we wait until the Fed loosens its money policy, and other economic indicators show that the economy is transitioning from a recession to a recovery phase. This presents an ideal opportunity to invest in stocks or real estate. However, the question remains: which stocks or industries should we focus on? By analyzing financial reports, we can gain deeper insights compared to other investors. We can identify companies that have the potential to generate significant returns of 100-200% over the next 3-5 years. This is the purpose of this section. Source: M Mido jouNON ad Se ect ne UT a Monetary and fiscal policy are two ways the government jumpstarts the economy during a crisis. Monetary policy is set by the central bank and adjusts the money supply to make borrowing easier. Fiscal policy is set by Congress and finances government projects to stimulate spending. Both policies were used in response to the COVID-19 s. The policies can impact investments, but there is a risk of increased inflation and future tax increases.STOCK BUYBACKS) GOOD OR BAD FOR INVESTORS? | {fe Stock buybacks occur when a company buys its own shares on the open market using excess cash. Companies can also choose to reinvest the profits into the business, pay dividends, or buy back shares. Buybacks have become increasingly popular as they can boost the stock's financial metrics, such as earnings per share. Buybacks can also have tax benefits and offset the increased number of outstanding shares from employee stock options Critics arque that buybacks can artificially inflate stock prices, create the wrong incentives, and put companies in a bad financial position. Leveraged buybacks are especially risky. aL: meses Titec 29 |T STRONG DOLLAR INDEX MEANS? In 2022, the value of the U.S. Dollar index rose about 12% while the S&P 500 fell about 20%. A robust DXY may indicate a contraction in the money ‘supply. ! i+ Tightening monetary policy can increase demand for dollars, as U.S. Treasury bond yields tend to rise, making them more attractive to foreign investors. i ;* Astrong dollar can hurt U.S.-based multinational corporations because it i makes U.S. goods and services more expensive overseas, reducing demand. ; Itean also suppress commodity prices and cause bond prices to fall as yields rise. : + U.S.-based multinational companies that get much of their revenue overseas | may be more sensitive to a strong dollar than companies that do more of their business in the U.S. Source: Sandy, W (2023)cca en The law of supply is like when you have a lemonade stand. If lots of people want lemonade, you will want to make more lemonade to sell, because you will make more money. The law of demand is like when you go to a store to buy something. If you really want a toy, you will be willing to pay a higher price for it, because you really want it. Market equilibrium is like when you are playing a game with your friends and everyone is happy with the rules. In economics, it means that there is a balance between how much people want to buy something and how much companies want to sell it. SUPPLY eoisri8 ae Podcast [ETMBILE Gch bs * Stock splits can be conventional or reverse. + Conventional splits increase the number of shares and decrease the price of each share. A company splits its stock when prices are high to increase liquidity. Splitting a stock does not change the total value of a company or the value of your investment. Reverse splits decrease the number of shares and increase the price of each share. Companies may enact reverse splits to avoid being delisted from an exchange. Podcast JRETAU ade) USMC asd ke Job report measures job creation, unemployment rate, average hours worked, and earnings in the labor market. A positive report with new job creation, low unemployment, and higher wages usually leads to higher spending and economic activity. The jobs report can impact the stock market, but its short-term effect is unpredictable due to factors such as interest rates and other employment- related reports. Investors should consider other economic indicators along with jobs reports to forecast the economic cycle. lrBLUECHIP Penny stocks are low-priced stocks sold for less than $5/share. They are not traded on major stock exchanges but on over-the-counter (OTC) networks. Penny stocks can be very risky due to high vola' and frequent fraud. Lack of information and low liquidity make them vulnerable to fraud and manipulation. To mitigate nvestors should do their homework and have a plan in place. Traditional risk management strategies and resources like OTC Markets Group can help make informed decisions. | iT [eeBLUECHIP Penny stocks are low-priced stocks sold for less than $5/share. They are not traded on major stock exchanges but on over-the-counter (OTC) networks. Penny stocks can be very risky due to high vola' and frequent fraud. Lack of information and low liquidity make them vulnerable to fraud and manipulation. To mitigate nvestors should do their homework and have a plan in place. Traditional risk management strategies and resources like OTC Markets Group can help make informed decisions. | iT [eeHS (0) EMCO Tame USO Sg Ce A recession is a significant decline in economic activity that lasts more than a few months. GOP is one potential predictor of an impending recession Real income tends ta drop and unemployment tends to rise during a recession. Recessions vary in size and impact, aren't always catastrophic, and are a normal part of the economic cycle. The yield curve, consumer confidence, and the Purchasing Manager's Index (PMI) are some indicators that signal hard times could lie ahead, but there's no way to know for certain if or when a recession might hit. Le rEGURU eh Public companies are owned by many people and sell shares on the stock exchange. Public companies have to share lots of financial information with everyone. Sometimes private companies become public through an IPO and sometimes public companies go private again. SRR UCU] UE Private companies are owned by just a few people and don't sell shares to the public. Private companies don't have to share as much financial information and have more privacy. Being a private company can mean more contral but also less money and more risk. Seats) (e) AiRCP Podcast JERRTa UT OILSS UOT es Le An IPO is when a company sells stock to the public for the first time. Companies go public to raise money and allow existing shareholders to profit. Advantages of gaing public include raising capital without debt, while disadvantages include increased reporting requirements and costs. A company needs an investment bank to underwrite the public offering of shares. Risks of investing in an IPO include lack of trading history and price volatility, but there is also potential for profit. elesTUE Wa aD Umm aes The Federal Reserve (the Fed) is the central bank of the United States. It determines the nation's monetary policy by controlling the money supply. The Fed uses its tools to influence the economy and keep two important metrics in check - unemployment and inflation The primary focus is the federal funds rate, which is the rate banks use when they lend to one another. By influencing this rate, the Fed can influence other short-term rates, which can impact the US economy To drive the federal funds rate toward its target, the Fed uses open market operations, where it enters the bond market to buy and sell government securities The Fed's actions can impact key economic measures, like unemployment and inflation. ute malin Payment Services Te aa eel) eo Cy Cee Creed ee ee ed eed ee ee ad eed ‘Overnight reverse repurchase agreements eee pes See eee a aed Ure LOLI Community Development ‘a eS ~~ Ce ees Dada leans allel Cet end Podcast [EMUre aaIN aM Ua sme Ua O(a dH io Lowering interest rates by the FED stimulates economic growth. When interest rates are low, it's cheaper for people and businesses to borrow money for big purchases or new ventures. This can create a cycle of spending and growth leading to more jobs and healthier inflation levels Stock and bond markets may see immediate changes when interest rates are cut. Historically, stocks, commodities, REITs, and gold have performed well in low interest rate environments. PodcastWHAT ARE THE FUNCTIONS OF {THE FEDERAL RESERVE] { xy Yield curve helps compare Treasury investments with different maturity dates for balancing risk and reward. You can calculate yield curve by plotting Treasuries by maturity date and yield. Lower yields are typically associated with shorter maturities and higher yields with longer maturities. Yield curve has three shapes: upward-sloping, downward-sloping, and flat * Inverted yield curve often predicts economic recession + Flat yield curve usually transitions between upward-sloping and downward-sloping. \oait POSITIVE Sai) ee Yields of shorter Inverted yield curve Flat yield curve is occurs when usually a transition investors expect from positive to maturities. economic growth to inverted or vice versa. This usually means slow down. there's economic This is a leading growth, leading to indicator of inflation and recessions. ultimately higher interest rates.SM UO sy LUTE) Stock market indices, such as the | Dow, sap 500, and Nasdaq, measure the | ; i performance of a collection of stocks. ' These indices provide a wider view of the stock market as a whole, as { opposed to looking at the performance of individual stocks. ' The Dow was the first index, published in 1896, consisting of 30 of the | largest and most successful companies in the US. The S&P 500 measures the performance of 500 of the largest publicly traded | : companies in the US and is widely considered the best measurement of the | : US stock market. | The Nasdaq includes more smaller companies and is a better gauge for the ' tec’ echnology industry. U.S. Stock Market NASDAQ 30 500 ~3000 stocks stocks stocks Source: Whyze (2020) Podcast [RECe CEI ala Stocks are investments in companies that provide ownership rights to assets and earnings, issued to raise funds for business growth. Dividends are corporate earnings that companies distribute to shareholders, while growth refers to an increase in the market value of a stock. Some stocks rely on growth (stock price) for profitability, others pay dividends. Owning stock means owning a part of acompany, becoming part of its brand, and potentially having a say in certain business decisions, depending on the type of stock. NO. Dividend payments are not guaranteed and subject to change, and share price appreciation is uncertainn 5-Year Bond suns A bond is a tradable debt obligation issued by a government or corporation that pays out regular interest until its maturity date, when the full amount is repaid. Bonds pay regular interest until they mature and are paid back in full. While the market value of bonds can fluctuate, investors typically rely on interest for profitability, Except for high-yield, bonds provide reliable income with lower risk, issued by successful governments or corporations and expected to pay out barring default. YES. Interest payments on bonds are predetermined and usually fixed, and as long as the issuer doesn't default, you can expect to receive them regardless of the company's input.GDP: GDP is a way to measure a country's economic growth. This includes what the government spends, what businesses invest, and what's imported and ! exported. We can use this number to compare countries and see if they are growing or not. Stock Markets: Stock markets are where people buy and sell stocks, which are parts of : companies that you can invest in. The prices of stocks go up and down : depending on many things, like how well the company is doing, or how the : economy is doing. Relationship: !* Stock markets and GDP usually go up or down together, but sometimes H they don't. In the past, when GDP went up, so did the stock market. But now, | sometimes the stock market goes up even when the GDP doesn't. This is because investors are looking at other factors like government policies, ; stimulus packages, corporate results, and FDI GDP Vs 5&P 500 Growth Bee verre arcs 17 IS EL ATS we IE a ie ae ame a Nemins! GDP Grewth © ——SP 500 Growth Expon, (Nominal GDP 6 Source: Real Investment Advice (2020) Podcast 7 GOP Vs S&P 500 GrowthPSN a BRE RS Yg UT Se f a, You can Different types invest in oy M TN Uae) q : x INDIRECTLY DIRECTLY Traditional eV Tirelis asset classes ert s-seb E tt) a ; MUTUAL FUND al Lo i HEDGE FUNDSInflation means that the prices of things you buy are going up over time. $0, | { _ the money you have today may not be able to buy as much as it could before. | i+ For example, if a farmer used to be able to buy a bag of fertilizer for $50, but : now that same bag costs $75, then that's a sign of inflation. It happens due to cost-push inflation, demand inflation, or governments printing more money. I>? p ass and os Rice, pasta, corncncal Tread Gasotine Source: ViswalCapitalist (2022) eat beveras “aK as and vegetables Apparel Beef and ¥eal ‘Smartphones LJ m ' ieee 11 |aT ee eb) ~ - = CPI measures the monthly price changes of a basket of goods and services purchased by consumers, while PCE evaluates inflation in hausehald expenditures and is used to adjust the calculation of Real GDP. FOMC uses PCE more frequently than CPI to make interest rate decisions, and their current inflation target of 2% is based on PCE. PPI is similar to CPI but focuses on the prices of goods and services used as inputs in creating other goods and services, affecting business expenses. opi qe PH) Cag en Vale Oa ern Yn a Ty come cw] Transportation PELE EWE CU cl $3.2K See eee cect ry Prt Ce CE ar LG 12.7% Ces ArT hk ey $4.4K CEL ey $4.5K Ape eel $4.8K eb Pace Cel 4 Ppa eer $2.1K | ere | enact Average $5,960 | ~ CPI = 5,960/ 5,591 - 1 = 6.6% re es a. a A eek eu ER UL a Cee eM len Cee Ve Bc ea | en RS UC UH UTM OEEM) MUTeiC mi LUel tl Mediate fn) ae esd oD = i enInflation has a significant impact on investments, and it's important to consider it before investing. The Federal Open Market Committee (FOMC) targets a set level of inflation (currently 2%) to benefit investors, consumers, and businesses. Unexpected high inflation is a cause for concern, as it reduces the purchasing power of the dollar over time. Inflation affects bond investments directly, and investors can demand a higher coupon rate (% interest) to offset its impact. Inflation impacts stock investments, and while hard assets appreciate, volatile earnings can negatively impact valuations. Investors should pay close attention to inflation and monitor inflation indices such as PCE and PPI, as well as wage growth to gauge potential future inflation. Source: Federal Reserve Survey of Consumer Finances (2016) | Podcast [BEThe Dow Jones Industrial Average is an index that tracks the performance of a selected group of stocks. It includes 30 market-leading companies from nine different sectors. It provides investors with a broad view of the overall market performance, : but has limitations. | The Dow's 30 companies are a narrow slice of the U.S. stock market The Dow is price-weighted, which means companies with a higher share price have a larger effect on the average, regardless of the company's actual size. i+ The S&P 500 index is market-cap weighted and includes 500 companies i from every sector. :* Some investors prefer the S&P 500 index as it provides a more accurate : representation of the market. i+ Using multiple indices can provide a more complete picture of the market : performance. Charles Dow (1851-1902) Co-Founder of Dow Jones & Company + Charles Dow co-founded Dow Jones & Company with Edward Jones and Charles Bergstresser. + Dow formulated the Dow Theory, an analysis of maximum and minimum 14 EEETreasury BONDS BONDS YIELD gah The yield on the 10-year Treasury note is important because it indicates the fate of return for investors who purchase 10-year treasuries. Itis a loan investment where investors loan money to the US government for a set period in exchange for a defined rate of return. It is driven by supply and demand, and investors often move to Treasury bonds during times of volatility in the stock market. The yield is also an indicator of investor sentiment about the direction of the economy, influences mortgage and business borrowing rates, and is a benchmark for valuing stocks and other risk investments. £o SIDES VY a eur ” . of Vif ae Government .<-~* = , _ settle \ \ estad ety = S NGL Me AA P= ee —— S riRS) PROTECTING { THEIR WEALTH? | Billionaires like Ray Dalio hold only 1% of their wealth in liquid assets like cash as their wealth is mostly tied up in business interests, stocks, bonds or real estate. + They are concerned about market fluctuations and seek ways to protect their + wealth by diversifying with safe-haven investments like gald, US Treasury | bonds, and cash. $+ Worties that keep even elite investors up at night include inflation, record | — high debt, bond market worries, geopolitical black swans, and overzealous central banks. Billionaires like Warren Buffet accumulate cash, while others like David Einhorn prefer gold, and Ray Dalia suggests 5-10% of a portfolio should be in gold. eR Ry UL Pod Ta) Podcast Source: Maximo Tuja (Jan 2022)tab ass] Normal yield curve: Short-term bonds have lower risks and produce lower yields than long-term bonds. The yield curve slopes upward. ; + Flat yield curve: Short-term bond yields increase and the yield curve flattens ; : during the Growth phase. Stocks generate higher returns than bonds when yield spread reduces. i+ Inverted yield curve: The yield curve inverts and yield spread turns negative ' when the economy is averheating. i+ Steep yield curve: The yield curve becomes steep during arecession asthe ; : Central bank cuts rates to stimulate the economy and long-term bond prices : { rise due to risk-aversion. Normalizing Yield Curve: Loose monetary policy has taken effect and the economy recovers. Consumption and investment rebound, and the Bank continues to loosen. The yield curve normalizes, and stocks and bond ee surge: © United States + NDS & Geman United Mingatoan Source: MacroMicro (2023)FED RAISES INTEREST RATE nay EXPECT? The Fed uses interest rates to stabilize the economy by controlling inflation i {and maximizing employment. ; {+ From 2010 to 2015, rates decreased to approximately 0%, resulting in SP500 ; : growth from 800 to 2400, peaking at 4800 in 2022 due to COVID. ; i + Inflation rose by 7% in 2021, and the Fed plans to raise rates in 2022 to ! combat this. i+ Rising rates can make borrowing more expensive, promote saving, and | reduce spending, impacting the stock market differently depending on the type of stock. ; The following chart demonstrates the inverse relationship between the FED : fund rate and the SP500. ; bo saa - ne. Source: MacroMicro (2023)FED RAISES INTEREST RATE nay EXPECT? The Fed uses interest rates to stabilize the economy by controlling inflation i {and maximizing employment. ; {+ From 2010 to 2015, rates decreased to approximately 0%, resulting in SP500 ; : growth from 800 to 2400, peaking at 4800 in 2022 due to COVID. ; i + Inflation rose by 7% in 2021, and the Fed plans to raise rates in 2022 to ! combat this. i+ Rising rates can make borrowing more expensive, promote saving, and | reduce spending, impacting the stock market differently depending on the type of stock. ; The following chart demonstrates the inverse relationship between the FED : fund rate and the SP500. ; bo saa - ne. Source: MacroMicro (2023)1 UNDERSTAND THE MARKETS | (WHEN to invest) {{e * Many individuals struggle in the investment sector because they focus too much on price action (technical analysis) or examining the income statement of a specific company. However, before doing so, they need to understand macroeconomics first since it offers valuable long-terms insights into broader economic trends that impact financial markets and individual investments, Macroeconomic factors include GOP, inflation, interest rates, and unemployment.TREE ONILSIANT | TO) eee Tah