Based on your knowledge of how stocks are valued (Chapter 10), and the impact of the market on stocks in general (Chapter 11), you realize that part of your investments education should be to consider the economy/market in more detail. After all, a poorly performing economy does not bode well for stocks. You have read enough about the recession that started in 2001, and the severe stock market decline that occurred during 2000–2002, as well as the December 2007–June 2009 recession and the dramatic market decline in 2008, to understand that if possible, such events are to be avoided, or at least the impact minimized. Clearly, it is worthwhile to know something about the overall tone of the economy and market, and at least be able to intelligently consider likely outcomes in the future.
Chapter 13 begins our discussion of fundamental security analysis by considering the economy and the market. This is the first step in the top-down approach because of the overall importance of the economy/market in impacting stock returns. A key issue here is the relationship between the economy and the stock market since they do not move in lockstep. Exhibit 13-1 illustrates the top-down approach to fundamental security analysis, which is covered in Chapters 13–15.
AFTER READING THIS CHAPTER YOU WILL BE ABLE TO: