WMS Market Analysis & Trends 2 — Questions and Answers
Question 1: Which economic indicator is considered a LEADING indicator of future economic activity?
- Unemployment rate
- Building permits (Correct answer)
- GDP growth rate
- Corporate earnings
Correct answer: Building permits
Building permits are a leading indicator because they signal future construction activity and economic expansion before it occurs.
Question 2: A yield curve inversion — where short-term rates exceed long-term rates — most commonly signals:
- Accelerating inflation
- An impending recession (Correct answer)
- A bull market in equities
- Rising commodity prices
Correct answer: An impending recession
An inverted yield curve has historically been a reliable predictor of economic recession, typically occurring 6–18 months before a downturn.
Question 3: In technical analysis, a 'head and shoulders' pattern is generally interpreted as:
- A bullish continuation signal
- A bearish reversal signal (Correct answer)
- A consolidation pattern
- A breakout signal to the upside
Correct answer: A bearish reversal signal
The head and shoulders pattern is a classic bearish reversal formation indicating that an uptrend is likely ending.
Question 4: The Shiller CAPE (Cyclically Adjusted Price-to-Earnings) ratio uses earnings averaged over how many years to reduce cyclical distortion?
- 3 years
- 5 years
- 10 years (Correct answer)
- 20 years
Correct answer: 10 years
The Shiller CAPE uses 10 years of inflation-adjusted earnings to smooth out business cycle fluctuations and provide a more stable valuation measure.
Question 5: When the Federal Reserve uses open market operations to purchase Treasury securities, this policy action is intended to:
- Reduce the money supply and raise interest rates
- Increase the money supply and lower interest rates (Correct answer)
- Strengthen the US dollar
- Reduce federal budget deficits
Correct answer: Increase the money supply and lower interest rates
Buying Treasury securities injects reserves into the banking system, increasing the money supply and putting downward pressure on interest rates.
Question 6: Which sector is typically considered MOST defensive during an economic recession?
- Consumer discretionary
- Technology
- Consumer staples (Correct answer)
- Financials
Correct answer: Consumer staples
Consumer staples companies sell essential goods like food and household products whose demand remains relatively stable regardless of economic conditions.
Question 7: The 'January Effect' refers to the tendency for which asset class to outperform in the first month of the year?
- Large-cap growth stocks
- Small-cap stocks (Correct answer)
- Investment-grade bonds
- Real estate investment trusts
Correct answer: Small-cap stocks
Small-cap stocks historically outperform in January, partly due to tax-loss selling in December followed by reinvestment at the start of the new year.
WMS Market Analysis & Trends 2
Which economic indicator is considered a LEADING indicator of future economic activity?