Security Analysis: Part 1- Economic Assessment

Security analysis begins with assessing the economy. These are the factors that affect the performance and profitability of the firms that issue stocks. As companies wax and wane with economic conditions so do the prices of their stocks. Security analysis ferrets out the extent to which individual stocks are affected by the various economic conditions. Some sectors of the economy will be more or less affected by specific economic events. Careful security analysis will highlight those stocks that are likely to suffer and those that will remain relatively unaffected.

Security analysis of specific sectors or specific stocks involves the study of targeted sectors of the economy. Economic analysis illuminates the basis for valuation of a targeted stock. Not all stocks are created equal and while some stocks plummet with economic uncertainty others will be relatively unaffected. Broadly speaking those companies that produce elective goods will be the first to suffer in a slowdown. The automobile industry is particularly vulnerable to economic downturns but companies who produce non-elective merchandise, particularly staple food items will be less volatile.

Keeping a running score of what is happening in the economy becomes the first activity of security analysis and is conducted both formally and informally. The economic measures most indicative of economic stability or change are: 

• Gross Domestic Product often referred to simply as the GDP this measurement reflects performance of the economics within the country as a whole. GDP is an assessment of the total monetary value of all the goods and services provided within this country. The GDP numbers are issued by the Commerce Department every three months. Keeping tabs on the GDP gives the security analyst a picture of the annual rate of growth or slump in real time dollar figures. When the GDP grows the potential affect is the beneficial for the securities market and conversely when the GDP plummets the securities market sags as well.