Equity Markets
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Equity Markets

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Equity Markets Equity Markets Presentation Transcript

  • Equity Markets and Measures of Wealth By: Amanda, Drew, Joe, Mark, and Ryan
  • Data Studied (I)
    • Quarterly trends of the stock market from Jan 1, 2004 to Dec 31, 2006
    • Compared to:
      • Net worth and single-family home purchases (personal)
      • NYSE, DOW, S&P 500 (business spending)
      • GDP (national)
  • Data Collected
    • Mainly through Surveys
      • i.e. U.S. Census
        • Shows government info on housing market and income
        • Given every 10 years
  • Gross Domestic Product
    • GDP= consumption + investment + gov’t spending + (exports - imports)
    • Tracked by the Bureau of Economic Analysis
  • Equity Markets (II)
    • Indexes are used to measure the performance of stocks
    • NYSE (New York Stock Exchange)
    • DOW (Dow Jones Industrial Average): 30 of the largest and most widely held public companies in the US
    • S&P 500 (Standard & Poors): measures the 500 large-cap corporations
  •  
  • Comparison of Net Worth and the Stock Market (III)
    • Kevin Warsh, Board of Governors “Markets affect monetary policy predominately through the information provided by asset prices.”
    • Post 9/11, Fed saw decrease in net worth through lack of confidence in stock market and began the 3 yr drop in the Fed Funds rate from 6.5% in Jan 2000 to 1% in July 2004
  •  
  • Housing Market
    • 6 in 10 homeowners have more equity than stock wealth
    • Lowering of interest rates made it cheaper to borrow money, causing mortgage rates to lower
    • Caused an increase in housing market, and a decline in the equity market
    • This in turn, sparked the economy’s growth to all-time highs and due to inflationary pressures, the Fed raised the Fed. Funds rate
    • Increased values in real estate caused individual’s net worth to increase also
    • Recently, housing mkt has decreased and has sent equity down and net worth has followed
  • Commodity Markets
    • Provided the greatest inflationary pressure on the economy and forced rate increases
    • Ben Bernanke: “One likely source of this deceleration (in consumer spending) was higher energy prices, which have adversely affected the purchasing power of households and weighed on consumer attitudes…”
    • Force consumers to spend money on goods and services instead on increasing their net worth
  • Stock Market Effect on Consumption (IV)
    • NY FRB compares this to look for a way to predict the behavior of consumers after an upward or downward trend in the stock market
    • For every $1 increase in wealth, avg consumption increases by about $.03 to $.04
    • However, is not correlated with future consumption growth and cannot predict it
    • Today’s stock market growth affects today’s consumption growth, not tomorrow’s
  •  
  • How Fed actions affect Consumption
    • Decreases the Fed Funds Rate
    • This decreases the cost of borrowing money, encouraging consumers to borrow money to increase consumption spending
  • Business Spending and the Stock Market (V)
  • Business Spending (cont.)
    • There is somewhat of a correlation between the equity market and business spending
    • Companies perform well, stock prices go up, causing equity to rise, companies then expand and spend more on facilities, employees, and projects
    • Thus, business spending increases
  • Business Spending (cont..)
    • Avg Business spending growth per yr over last two years: 9%
    • Avg GDP growth per yr over same period: 7%
    • Percent of business spending at the end of 2005: 10.75%, well below average
    • Could be due to recent accounting scandals and passing of the Sarbanes-Oxley act requiring companies to spend more money ensuring their books are in order
    • Businesses investing more overseas
    • Business spending is expected to grow steadily throughout the year
  • GDP and the Stock Market (VI)
  • GDP and the Stock Market (cont.)
    • Std dev for the % change in GDP is about .3, as opposed to about 3.2 for the DOW...little to no correlation
    • Partly de to the fact that GDP includes government spending, which is not portrayed very well on the stock market
    • Although the indexes take into account a large portion of business spending, it does not account for all of it
  • FOMC and GDP
    • If GDP increases rapidly, it can be seen as a sign of inflation
    • The Fed will then raise the Fed Funds Rate to counteract the inflation
    • However, the GDP is slowly increasing, leaving one to believe that the Fed Funds Rate should not be adjusted
  • Conclusion (VII)
    • Keep Fed Funds Target Rate at 5¼%
    • Indicators have been mixed citing stronger than expected job growth and decreases in overall business spending
    • Inflationary pressures do exist, but business expansion should grow at a moderate pace
    • Future changes will depend on inflation and future outlooks