Economic Factors and Business Information

About 5% of the Series 66. Advisers must read the economy well enough to explain it to a client.

The business cycle

Expansion (growth, hiring), peak, contraction (recession), trough. Equities often do better late in expansion; high-quality bonds and cash look better when the cycle turns down. No one times this perfectly; the point is to match the portfolio to the client's horizon, not to a headline.

Inflation and interest rates

Inflation is a general rise in prices. The Fed fights it by raising the federal funds rate. Bond prices fall when rates rise. Real return is nominal return minus inflation. A 5% coupon in 4% inflation is about 1% real.

Indicators

• Leading: new orders, building permits, the yield curve (often invert before recessions).
• Coincident: payrolls, industrial production.
• Lagging: unemployment rate, commercial loan delinquencies.

Financial statements

The balance sheet is a snapshot (assets = liabilities + equity). The income statement is a movie (revenue minus expenses). The cash-flow statement shows cash in and out. An adviser who cannot read these will miss leverage, thin margins, and cash burn.

Time value of money

A dollar today is worth more than a dollar next year. Present value discounts future cash. NPV and IRR compare projects. You do not need to be an actuary; you do need to know that a long stream of cash is worth less when discount rates are high.