Question

"In the late summer of 2005 some regions of the country were suffering from drought. What effect would we expect this to have on the stock of companies such as John Deere that manufacture farm equipment?

Answer 1

Answer:

The answer is: You would expect a lower stock price.

Explanation:

Since John Deere´s main business is manufacturing and selling farming equipment you would expect its sales to rise when farmers are having a successful business year. But when farmers are having a very harsh and bad economic year then you would also expect John Deere´s sales to fall.

If your clients are suffering from a drought that means they will probably lose money or in a best case scenario earn a smaller profit. So they will have less money to invest in new equipment which results in lower sales for companies like John Deere. If John Deere´s sales are lower, they themselves will have a bad economic year so it is logical to assume that their stock price will fall.