Transcript Factors in Risk

MACROECONOMY
AND
STOCKS
Portfolio Management
Ali Nejadmalayeri
Active vs. Passive
Factors in Return:
1. Market
2. Industry
•
•
•
•
Growth
Cyclical
Stable
Energy
Factors in Risk:
• Beta or Market Risk
• Extramarket
Covariance or
Industry Risk
• Residual or Specific
3. Individual
Active Management
Passive Management
Active Strategies
• Market Timing:
– Set strategies based on “Market” movement
• Selective vs. Diversification:
– Able to find “gems” or simply hedge risk
• Group Rotation:
– Shift between overrepresented (over-bought)
and underrepresented (over-sold) industries or
group, e.g., shifting from growth to value at the
end of 1999
Group Rotation
• In equilibrium each sectors represents
certain percentage of the total market cap.
The proportion of the value of these sectors
to other sectors, however, changes thru
time. If the proportion is mean reverting,
i.e., hovers around some long-run average,
then when one sectors gets overloaded, it
ought to come down and vice versa.
– ETFs based strategies
– Services provided for rotating the sectors
Sector Rotation
This chart is based on Sam Stovall's S&P's Guide to Sector
Rotation and states that different sectors are stronger at
different points in the economic cycle.
Economic Indicators

GNP gap:


E(RM) 
Var(RM) 
M1 

E(RM) 
Var(RM) 

E(RM) 
Var(RM) 
Inflation


Tbill  
growth in money supply


E(RM) 
Interest rate change


GNP  
CPI 
Others: Liquidity, P/E ratio, Housing , etc.
From Flannery and Protopapadakis (2002) Review of Financial Studies
Economic Indicators
• Leading, Lagging, and Coincidental
• Traditional Leading Indicator:
– The average manufacturing-worker workweek (from the employment
report)
– Initial jobless claims
– Manufacturers' new orders for consumer goods and materials (from
the factory orders report)
– Vendor performance (from the Purchasing Managers' Index report)
– Manufacturers' new orders for nondefense capital goods (from the
factory orders report)
– Building permits (from the housing starts report)
– The level of the S&P 500
– The inflation-adjusted measure of the M2 money supply
– The interest-rate spread between the 10-year Treasury note and the
fed funds rate
– The expectations portion of the University of Michigan's Consumer
Sentiment Index
Why Macroeconomy?
• Consumer consumption (70% of GDP)
– Nondurable goods 29%
• Food, clothing, gasoline, drugs, cleaning supplies, ...
– Durable goods 12%
• Motor vehicles, furniture, sporting, tools, books, …
– Services 59%
• Housing, medical, education, transport, recreation, finance, …
• Government Spending (19% of GDP)
• Capital Spending (16% of GDP)
– Equipment and Software 50%
– Residential structures 35%
– Nonresidential structure 15%
Cause and Effects
Courtesy of www.aheadofthecurve-thebook.com
Obsession with “R” Word
Courtesy of www.aheadofthecurve-thebook.com
Consumption & Productivity
Courtesy of www.aheadofthecurve-thebook.com
Productivity & Cap Spending
Courtesy of www.aheadofthecurve-thebook.com
Consumption & Cap Spending
Courtesy of www.aheadofthecurve-thebook.com
Consumption, Earnings & Stocks
Courtesy of www.aheadofthecurve-thebook.com