Equity Markets and Measures of Wealth By: Amanda, Drew, Joe, Mark, and Ryan
Data Studied (I) <ul><li>Quarterly trends of the stock market from Jan 1, 2004 to Dec 31, 2006 </li></ul><ul><li>Compared ...
Data Collected <ul><li>Mainly through Surveys </li></ul><ul><ul><li>i.e. U.S. Census </li></ul></ul><ul><ul><ul><li>Shows ...
Gross Domestic Product <ul><li>GDP= consumption + investment + gov’t spending + (exports - imports) </li></ul><ul><li>Trac...
Equity Markets (II) <ul><li>Indexes are used to measure the performance of stocks </li></ul><ul><li>NYSE (New York Stock E...
 
Comparison of Net Worth and the Stock Market (III) <ul><li>Kevin Warsh, Board of Governors “Markets affect monetary policy...
 
Housing Market <ul><li>6 in 10 homeowners have more equity than stock wealth </li></ul><ul><li>Lowering of interest rates ...
Commodity Markets <ul><li>Provided the greatest inflationary pressure on the economy and forced rate increases </li></ul><...
Stock Market Effect on Consumption (IV) <ul><li>NY FRB compares this to look for a way to predict the behavior of consumer...
 
How Fed actions affect Consumption <ul><li>Decreases the Fed Funds Rate </li></ul><ul><li>This decreases the cost of borro...
Business Spending and the Stock Market (V)
Business Spending (cont.) <ul><li>There is somewhat of a correlation between the equity market and business spending </li>...
Business Spending (cont..) <ul><li>Avg Business spending growth per yr over last two years: 9% </li></ul><ul><li>Avg GDP g...
GDP and the Stock Market (VI)
GDP and the Stock Market (cont.) <ul><li>Std dev for the % change in GDP is about .3, as opposed to about 3.2 for the DOW....
FOMC and GDP <ul><li>If GDP increases rapidly, it can be seen as a sign of inflation </li></ul><ul><li>The Fed will then r...
Conclusion (VII) <ul><li>Keep Fed Funds Target Rate at 5¼% </li></ul><ul><li>Indicators have been mixed citing stronger th...
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Equity Markets

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Equity Markets

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

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