Problem
Kaplan Family Office
Carlos del Moral is director of investments at Kaplan, the family office of José María Pascual, a businessman in the technology sector. At the beginning of each year, Carlos de Moral meets with Mr. Pascual to review in depth the economic perspectives for the coming year and to establish the investment strategy. Mr. Pascual is a businessman with little financial training but with an interest in understanding the basic foundations of Carlos del Moral's analysis.
To put the meeting in context, Carlos del Moral begins by making a presentation on the current economic cycle. Before continuing, Carlos explains how to identify the different economic cycles and makes the following statement:
"We can consider that we are in a phase of economic recession when there is a quarter with a negative economic growth rate. On the other hand, in periods of recession, inflation tends to remain very high"
Subsequently, Carlos del Moral explained that in his opinion, we are currently in the last part of a recession phase and he remains optimistic for the coming months as we could see the beginning of a recovery. To support his opinion, Carlos cites some recently published economic magnitudes:
a) Consumer Confidence: 60 vs. 55 Previous
b) ISM Manufacturing 51 vs. 42 Previous
c) Housing construction permits: 100 thousand vs. 40 thousand previously
d) Unit labor costs: +1% vs. +1.5% previously
e) Industrial production: +3.1% vs. 3% previously
During the conversation, Mr. Pascual comments to Calos del Moral on his personal opinion and poses the following question:
"During the last two months, the Equity markets have had a very positive behavior and have had average increases of 5%. I have always understood that the markets are ahead of the cycle, is this correct?"
Task
A. Is Carlos del Moral's statement about the economic recession phase correct?
B. Among the economic data used by Carlos de Moral, which can be considered coincident and delayed indicators? Why is Consumer Confidence relevant?
C. What can Carlos del Moral answer to José María Pascua's question about the behavior of the equity markets?