Investment Case

Use the macro market analysis technique to outline a portfolio construction plan

Explore the relationship between the economy as measured by GDP and stock prices as measured by the S&P 500 post year 2000.

Explore the general relationship of the stock market, bond market, and interest rates. Discuss the historic impact of:

a) inflation on interest rates

b) inflation and interest rates on equity prices.

List three additional factors that affect security

Answer:

The macro market analysis states that the portfolio construction plan must be outlined if it achieves economies of scale and economy of scope and help to reduce the risk associated with investing in only one economy. Economy of scale helps to the reduction in the average cost of a product or a product set as the level of output expands, whereas the economy of scope helps to decrease the cost as a firm makes a range of different product rather than specializes in just on product.

GDP is an indicator of how the economy is performing; it is a measure of the market value of all final goods and services produced within a given point of time. So GDP is a measure of economy's output. Post 2000 when most of the economies in the world have become global GDP indicates which country is producing how much and that growth in that production is measured as economic growth. As far as Stock price and S&P 500 post 2000 is concerned stock price is mainly guided by the movement in the stock market like S&P 500. Here S&P 500 has become a benchmark and it states which stock has perform how much as compared to the S&P 500.

(a) Inflation and interest are directly proportional to each other; an interest rate is heavily affected by the rate of inflation as the inflation is the component of the interest rate. If we look at the past records we can find that whenever the inflation increased the Fed has increased the interest rate accordingly and whenever it has decreased the FED had decreased the interest rate.

(b) Inflation rate and interest rate has an impact on the stock price because the inflation and interest rate play a leading role in the borrowings, as opportunity cost and as cost of capital for companies. So whenever the inflation and interest rate has increased the price of the stock has gone down.