The first step in the top-down approach to investing is assessing the state of the overall...

The first step in the top-down approach to investing is assessing the state of the overall economy. Assume the following data for a hypothetical economy.

Item	2 quarters ago	Previous quarter	Current quarter
New Filings for unemployment benefit	5,000	40,000	80,000
Stock market index	1500	1200	1000
Industrial Capacity utilization	60%	50%	40%
Change in Factory Orders for machinery and equipment	5%	-12%	-20%

a) Determine in what stage the economy is in the business cycle. Explain your answer.

b) Give an example of an industry that is good for investment at this stage of the business cycle. Why?

Expert Solution

The industry has been in the business cycle 2 quarters ago when the employment level was sufficient and the industries were producing at higher capacity of 60% as compared to the present scenario of 40% utilization. Other factors signifying the same are the Stock Market Performance and Change in Factory Orders for machinery and equipment. The market was in bull state2 quarters ago and the chnange in factor orders was a positive increase of 5%.
It looks like the situation of a recession where unemployment is increasing and the production is also down. In this situation, the only industry that will perform for sure is the FMCG or the Fast Moving Consumer Goods Industry. No matter if there is infkation or recession, people will definitely buy the essential goods. Thefore, the investment can be made accordingly.

Rahul Sunny answered 2 years ago

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