How to make economic forecasts personal

Accounting for variation

What if other bath toys—in a variety of shapes, sizes, weights, and materials—were stored inside the shipping container that sank in the Atlantic? The variations would add a few complex layers to the toys’ transatlantic adventure. Similarly, in the finance world, various securities behave individually during various economic cycles and events. Part of financial forecasting includes assessing securities, such as stocks, based on the issuing company’s assets, earnings, and liabilities. Through this valuation analysis, we attempt to find the “true” value of an investment, which can help us gain insight into the company’s value relative to other companies in a similar sector or field. Taking this a step further, we can use our understanding of many different securities, such as domestic and international stocks and bonds, to understand how they’re likely to behave together under certain market and economic conditions. For instance, if I toss thousands of assorted bath toys into the ocean off the New Jersey coast, it’s unlikely that every bath toy will follow the same path across the Atlantic. Some may meander slowly eastward, while some may move quickly. Still others may end up going another direction. But thanks to our knowledge of currents and winds, we can confidently predict the most probable landing spot for the majority of the bath toys over the long term.

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