Researching Investments: Economic Outlook (Part Two)

Once you’ve decided what your risk/return needs are and how long you plan to be investing in the market, you should come up with your own economic outlook. Purchasing any type of stock without analysis of the outside economic factors that could influence the return is not good. For example: let’s say you like a mortgage company- they’ve got a low P/E ratio, you like the revenue growth, and you’ve analyzed all their liquidity and debt ratios. However, since you’ve been reading the news in the past few days, you know that sub-prime lenders are taking a big hit right now, so you maybe you think that you should wait to purchase shares. If the lender is in the sub-prime market, you are right. But if the lender is in just the prime market, now may find this is not the case. Because interest rates have risen, a lot of sub-prime lenders are going under because a large number of consumers with adjustable-rate mortgages are defaulting on their loans. But the consumers with good credit and fixed-rate mortgages are still doing fine and able to make their payments. The stocks of the prime market are adversely (but unnecessarily) affected by the sub-prime market, and thus you may find that these stocks are under-valued.
You should read the Financial Times or Wall Street Journal daily, and I have my homepage set up to Bloomberg.com. Below from Bloomberg.com is today’s inverted yield curve, which shows investors expect the fed to cut interest rates in the next few months. The question is: do you?

You should also read the Chairman of the Federal Reserve’s speech to Congress, made semi-annually. This can be found at http://www.federalreserve.gov/boarddocs/hh/ . Ben Bernanke’s latest from February is posted now, as well as the two from last year. I would also visit http://www.aei.org/, which is the American Enterprise Institute of Public Policy Research. Economic papers are released monthly, with great analysis of the current market and the economic outlook of the markets in years to come. Identify all the factors you feel would have an impact on the stock/bond market, and be sure to familiarize yourself with each of these. Establishing your own opinion on the market in the next year, 5 years, and 10 years is crucial to assembling your portfolio. You should forecast the next 5-10 years in both the stock and bond markets.