“The brightest people in the world didn’t see [the recession] coming.” JOHN CHAMBERS, CEO, CISCO SYSTEMS INC.
“It was obvious the booming economic cycle couldn’t continue. We tightened our belts. We focused on cash flow.” RALP H LARSEN, CEO, JOHNSON & JOHNSON
As these two sharply contrasting views of the 2001 recession suggest, some managers seek to manage the business cycle proactively, while others deem it a pointless exercise. There is a similar divergence of opinion within academia. Many professors of both economics and finance believe that, like the stock market, the business cycle is a “random walk” that can’t be predicted — and therefore can’t be managed. Others believe that managers who carefully cultivate financial market literacy, who studiously follow leading economic indicators and who draw upon various forecasting models are likely to manage their companies better than their peers. I belong to that contrarian minority.
Prior to the 1980s, most economists viewed the business cycle as largely unsystematic and unpredictable. Since the 1980s, however, there have been numerous studies validating the predictive value of a number of leading economic indicators, including stock prices, the so-called “yield curve” and the Conference Board’s Composite Index of Leading Economic Indicators (an index that reflects both the yield curve and stock prices as well as eight other indicators).
Despite the existence of these studies, many academics still reject their findings... To read the complete article, login or sign-up using the form below.
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