Question

First, review the module resources in order to enhance and deepen your knowledge of the five key investment concepts that every investor should be aware of:

Evaluating investment performance

Diversifying portfolios

Asset allocation Investment risk

Rebalancing of a portfolio Based on your reading and research, address the following in your initial post to the discussion:

When analyzing key macroeconomics to assess GDP growth/decline, how would you measure the performance relative to sequential and year-to-year data?

How will your analysis assist you in determining the direction of the stock market?

Why do you consider the relationship between the economy and the stock market an integral part of the investment process. Explain your reasoning. Please list sources...

Answer 1

For sequential performance, we would measure GDP reported for every quarter and measure the GDP growth estimated for every quarter. Thus comparing the GDP growth for this quarter as compared to the previous quarter give us the sequential growth. If we compare the GDP growth achieved in this quarter against the GDP growth achieved in the same quarter last year, then year on year growth is computed.

A growing GDP growth trend indicates a robust condition of the economy and so the stock market is also expected to rise under these conditions. While if the GDP growth is decreasing or there is a recessionary tendency, then the stock market would also show a decreasing trend.

The relationship between the GDP growth and stock market is an integral one. If the economy grows, then the industry and business operating in the economy is able to generate more goods and sell more thus generating more revenues and profits. This, in turn, will lead to a greater price of the shares as investors would try to bid more in turn for shares of companies which are showing increasing profits. Consequently, the stock prices would go up and the stock market would also rise.