Why would you expect a relationship between economic activity and stock price movements?
The stock market is a reflection of the economic conditions of an economy. If there is a growing economy, then the productivity will be accumulating and most organizations will experience accumulative cost. The attractiveness of the company’s share depends on high profit. If the economic activity and stock price movement ratio remains the same, or increases due to higher anticipations, the increase in stock prices will be expected. In addition, the traditional approach of stock prices and the “wealth effect” shows why stock prices and economic activity have an impact on each other. This approach indicates that the anticipations of tomorrow’s economy are reflected in the stock prices. Also, the “wealth effect” suggests that stock prices result in economic actions by being an enabler to what occurs in the economics world. However, critics claim that the anticipation of tomorrow’s economic action is reckoned by human error which might result in a decline in stock prices. Before the economy increases, stock prices rise more often because the investors do not expect in the right way and this results in misleading information regarding the economy. They also do not believe the stock market regarding tomorrow’s economy due to the anticipation of investors. Variations in economic activity might pave the way by transitions in stock prices. Stock prices are essential because they offer more support for economic activities. The stock profitability is determined by economic activities.
2a). There is a strong, consistent relationship between money supply changes and stock prices
When there is an increase in money supply, it results in higher demand for equity. Many investors have a tendency to turn to equity due to its promised higher return over bonds, which causes an increase in the stock price. The stock prices have a tendency to increase when money supply in an economy increases. The circulation of plenty of money in the economy enables the investment in stocks and, makes other investment resources like bonds unattractive. Therefore, it predicts the following unanticipated increase in the money supply, the stock prices will increase.
b). Money supply changes cannot be used to predict stock price movements.
The money supply can’t predict stock price movements because the stock market actually responds instantly to alterations in money supply or investors’ endeavours to predict this essential variable. Therefore, the past transitions in the growth of the money supply make it impossible for the development of surplus profit. This indicates why it is difficult to predict stock price movements through the money supply.
Discussion on why it is harder to estimate the effect of a change in interest rates on common stocks than on bonds. Discuss this contention
If the interest rates increase, stock prices will decrease since some investors will choose to move their money from stocks to bond because bonds have become eye-catching than it used to be and this decreased demand for stocks will result into a decrease in stock prices and if the interests go down, stock prices will increase because some investors will choose to sell their bonds so that they can move to stock. Interest rates can have flow impact through financial markets. If the companies experience falls in their stock prices, the whole market will go down. Additionally, with lower anticipation in the growth and impending of cash flows of an organization, the investors will not get expected growth from the appreciation of stock price. The stock’s movement has an impact on consumption and investment.
An investor is convinced that the stock market will experience a substantial increase next year because corporate earnings are expected to rise by at least 12 per cent. Do you agree or disagree? Why or why not?
Though commercial remunerations might increase by 12% next year, the information itself does not guarantee an increase in the stock market. The market level is a product of the company’s remuneration and the earnings multiples. The earnings multiples are not stable, therefore, they must be estimated. Additionally, if the increase in earnings is already expected as of now, the market prices will already show these anticipations.
Why it is important to estimate operations margin and work down
The operating margin shows how much profit a company makes in terms of sales, and production cost. It is important to estimate the operating profit margin so that there can be an accurate comparison of companies that work in the same industry and have the same business approaches. It is identified as a key measure in the stock valuation analysis. The higher the operating margin, the better because it is a good pointer a company is managed well and is possibly less of a risk than a company with a low operating margin. Apart from revising operating margins, investors also assess other important metrics such as the cost of goods sold, non-cash expenditures, and earnings before interests, depreciation, taxes and amortization. The company needs to ensure that there is a healthy operating margin to pay for its fixed costs like interest on taxes or debts. Therefore, estimation of operations margins and work down so that the company can analyze accurate investments.