Interest Rates

Leading economic indicators (stock prices, building permits, consumer confidence, manufacturing orders) predict future economic activity. Lagging indicators (unemployment rate, interest rates, business loan volumes) confirm trends after the fact. The Conference Board's Leading Economic Index (LEI) is a commonly cited composite of ten leading indicators.

Key Terms:

• P/E ratio (Price-to-Earnings): Market price per share divided by earnings per share; primary valuation metric for equities.
• P/B ratio (Price-to-Book): Market price relative to book value (net assets) per share; below 1.0 may signal undervaluation.
• Debt-to-Equity ratio: Total debt divided by total equity; measures financial leverage and solvency risk.
• Return on Equity (ROE): Net income divided by shareholders' equity; measures management's efficiency in generating profit from equity.
• Present Value (PV): The current worth of a future cash flow discounted at a specified rate.
• Future Value (FV): The value of a current investment after compounding over a period at a given rate.
• Discount rate: The rate used to convert future cash flows to present value; reflects risk and opportunity cost.
• Business cycle: The pattern of economic expansion and contraction; phases are expansion, peak, contraction, and trough.
• Leading economic indicator: Data point that changes before the economy changes; used to predict future economic activity.