Deck 28: Tying It All Together

Question 1

Why do markets react to some economic indicators more than others

Answer 1

There are many economic indicators out there. Some are broad, such as GDP growth, unemployment level, etc. Some are more focused, such as new car sale, retail sales, plant and equipment orders, etc. Economic indicators differ in terms of who creates them, how often they are adjusted, and how precise they are. Economic indicators that have been just released and are new to market investors - will have the biggest impact. Indicators that can be forecasted - have less of an impact, since the information is outdated and is already included in market valuation.

Question 2

Why do investors care so much about what the Federal Reserve is likely to do in the future

Answer 2

Investors care about Federal Reserve's actions because the Fed has a major influence on financial markets. The Fed can engage in open market operations or it can change the fed funds rate. These actions could change the money supply and the interest rate, thus influencing bond and stock prices.

Question 3

Why is "good news" bad news for bond prices

Answer 3

We know that bond price is computed via dividing its face value by the interest rate. We also know that the face value is a set amount, thus the only thing that can change the price of a bond is its interest rate. The interest rate can be affected by inflation and by monetary policy. Good news about the economy will generate expectations of increased inflation and increased fed funds rate, which will raise the interest rate on a bond and thus reduce its price.

Question 4

Why isn't "good news" bad news for stock prices

Question 5

Discussion question: Many of the economic indicators are produced by government agencies. Should we invest more money in these agencies in order to get more precise estimates, or should we move in the opposite direction and rely more on the private sector for generating measures of economic performance