Fundamental Analysis For Dummies, 2nd Edition

Chapter 15

Performing “Top Down” Fundamental Analysis

IN THIS CHAPTER

Realizing how the economy’s condition can be a factor in your fundamental analysis

Understanding how the cycles of the economy play a role in a company’s profitability

Analyzing and accessing key economic data released by the government

Using “leading” economic indicators to help you gain a better idea of a company’s future

Even the best company or investment can be tripped up by a lousy economy. This truth was demonstrated in brutal fashion during the stock market decline that began in 2007, as prices of all sorts of stocks were punished, with little regard to what fundamental analysis would tell you. Similarly, stocks benefitted greatly from the nine-year period of falling short-term interest rates that didn’t end until 2015.

Here’s the harsh reality: Companies are subject to the vagaries of the broad economy. It’s not good enough to just understand a company inside and out. You need to understand the broader macroeconomic factors that can either give a company a tailwind – or a headwind. Understanding the ups and downs of the economy, and the resulting business cycle, is what’s known as top-down analysis. Top-down analysis is a critical adjunct to fundamental analysis, helping you make sure you’re investing in the right companies for the right price at a good time.

This chapter will show how the health of the broad economy is a factor in the health of individual companies. You’ll also discover how changes ...