Investment Analysis: Understanding Economic Indicators and Product Life Cycle

Running head: INVESTMENT ANALYSIS
Investment Analysis
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1INVESTMENT ANALYSIS
Answer to Question 1
i) In the given news article of CNBC, the indicators refers to the mechanism or tool that
helps in the reduction of trends of finance or trends. For instance it can be said that
economic or social statistics that is published by accredited sources like the
departments of the government of U.S. the most commonly used indicators are rate of
unemployment, inflationary indexes and confidence of customer.
The difference between the indicators in context of field of finance is as follows:
An indicator is anything that can be used to predict future financial or economic trends. For
example, the social and economic statistics published by accredited sources, such as the various
departments in the U.S. government, are indicators. Some of the popular indicators they put
out include unemployment rates, housing starts, inflationary indexes, and consumer confidence.
Official indicators must meet certain set criteria; there are three categories of indicators,
classified according to the types of predictions they make.
Leading indicator: the leading indicator is used to signal the entire events. It is used to speculate
and anticipate the future economic trends in the stock market. The stock prices, money supply,
m2 are few examples of leading indicators1. Bond yields are thought to be a good leading
indicator of the stock market because bond traders anticipate and speculate trends in the
economy (even though they aren't always right). New housing starts, money supply, M2, and
stock prices fall under leading indicators.
Lagging indicators: The lagging indicators are used for following a particular event. The purpose
of this indicator is to to confirm the technique or pattern of the event. It can be said that the rate
of unemployment is a popularly used lagging indicators. The consumer price index that is also a
1 (Investment Analysis of Photovoltaic Roof Project Based on Real Option, 2017)

2INVESTMENT ANALYSIS
lagging indicator that helps in the measurement of the rate of inflation. The importance of a
lagging indicator is its ability to confirm that a pattern is occurring. Unemployment is one of the
most popular lagging indicators. If the unemployment rate is rising, it indicates that the economy
has been doing poorly. Another example of a lagging indicator is the Consumer Price
Index (CPI) which measures changes in the inflation rate.
Coincident Indicators: The coincident indicator as the name suggests is used approximately at
the time as the events or conditions take pace. This indicators rather than predicting the future
events they change at the same time as the stock prices changes. The instances of the coincident
indicators refer to the personal income and GDP that are popularly used as the tool to analyze the
economic changes and conditions2. The gross domestic product (GDP) of an economy is also a
coincident indicator.
Economic indicators are a useful but imperfect tool for seeing there the economy has been,
where it is, and where it’s going. Economic indicators are subject to interpretation, and
conflicting data from one release to the next is common. It is therefore best to look at overall
trends in data, as well as assessing all three economic indicator classes: leading, lagging and
coincident. By following a couple of indicators in each class, investors are more likely to be able
to get a read of overall conditions.The stock market itself is one of the most powerful leading
indicators we have, which means applying economic data to try to predict it is often fruitless;
instead, use the stock market to predict where the economic cycle is headed.
ii) The leading indicators are a good tool for the anticipation of the economic conditions, the
managers of investment must be made aware of the information and in possible effects,
and the investment decisions might reflect the trends that are projected. However, the
indicators are not fallible; they help in the generation of false signals. if there is downfall
2 Capital Budgeting Valuation (Wiley, 2015).