Securities Markets

Instructions: 1. An individual whose livelihood depends on knowledge and understanding of developments in U.S. securities markets has approached you at 8:00 am on Friday, January 20. For some reason, she has been away from her job and is totally unaware of anything that has transpired in those markets since they closed on Friday, December 30. Using a font size no smaller than 11, margins no less than 0.8”, and one side of an 8½ x11” sheet of paper, bring her up to date. [Note: Your summary should address (i) the direction, magnitude, volatility, and significance of the changes in stock prices and Treasury bond yields during the period, (ii) major news (e.g., earnings reports, macroeconomic reports, government policy changes, international events) that has affected the markets, and (iii) overhanging concerns for the securities markets in the weeks ahead.]#1

       SAMPLE

Economics 334                                                                                                                  Professor Kenney

Securities Markets Briefing                                                                                               January 20, 2016

 

Index/Maturity  Close, 12/31  Close, 1/19   High Close    Low Close      Change
      DJIA        17425        16016       17425       15988      –  8.1 %
     S&P500          2043          1881         2043         1880      –  8.0 %
    NASDAQ          5007          4476         5007         4476      – 10.6 %
   3-mo T-bill    0.15 (0.16)      0.23 (0.26)    0.24 (0.26)    0.15 (0.16)   +  8 (10) bp
  10-yr T-note          2.27      2.04 (2.06)         2.27         2.03   – 23 (21) bp

U.S. Equity Market Indices and Treasury Market Yields, 12/31/2015 – 1/19/2016

Volatility of equity prices—5 ‘up’ days in DJIA and S&P500 but sharp ↓ on 6 trading days (3 days > 1% and 3 days > 2% (3% for NASDAQ)) b/c of ↓ oil price, upheaval in Chinese equity market and fears of slowing global growth

Treasury yield curve ↑ ~10 bp at very low end (1-3-mo maturities) b/c of recent Fed action, but ↓ ~15 bp at 6mo-2yr  and ↓ ~20-25 bp at long end (3yr-30yr) b/c of safe haven flight and reports of zero inflation

 

Macroeconomic indicators/news:

  • General Economy: ISM reports [1/6] non-manufacturing index reflects continuing expansion; Commerce Dept reports [1/8] wholesale inventories ↓ 0.3% in Nov; U.S. Treasury reports [1/13] budget deficit in 2015 at lowest level since 2007 (2.6% of GDP); Fed Beige Book reports [1/13] economy expanding at moderate pace in most of 12 districts, limited by weak global demand and strong dollar; China reports [1/19] continued slower GDP growth of 6.8% in 4Q15 (6.9% for year) and forecasts similar growth rate in 2016 → less boost to slowing world economy
  • Fed/Monetary Policy: Minutes of FOMC December meeting [released 1/6] indicate concern over persistence of low inflation rate despite unanimous decision to raise short-term interest rate by 25 bp
  • Inflation: Labor Dept reports [1/15] wholesale prices ↓ 0.2% in Dec (-1.0% y-o-y) while core rate ↑ 0.1% (+0.3% y-o-y) → inflation remains well below Fed target
  • Employment: Labor Dept reports [1/8] much g-t-e nonfarm payroll growth of 292k jobs in Dec tho wage growth remains near zero
  • Manufacturing: ISM reports [1/4] manufacturing index registered slight contraction in Dec (weakest conditions in 6 yrs) and Commerce Dept reports [1/6] factory orders in Nov ↓ 0.2% (core capital goods ↓ 0.3%) b/c of weakness in exports and domestic energy demand; Fed reports [1/15] index of industrial production ↓ g-t-e 0.4% (-0.1% manufacturing) in Dec → confirmation of softness in manufacturing
  • Housing/Construction: Commerce Dept reports [1/6] 0.4% ↓ in construction spending in Nov (tho +10.5% y-o-y and +0.3% in residential building in Nov); Nat’l Assoc of Home Builders reports [1/19] home builders’ confidence continues strong readings of past few months, tho expectations of future sales dips
  • Consumer Spending/Confidence: Auto sales ↓ 5.0% in Dec to annual level of 17.3 mm vehicles) [1/5] →

l-t-e overall retail sales; Commerce Dept reports [1/15] retail sales ↓ 0.1% in Dec (w/ & w/o autos)—overall 2.1% ↑ in 2015, appreciably slower than in 2014; preliminary Jan reading [1/15] of UMich index of consumer sentiment →  consumer spending will continue at moderate pace

  • Trade Balance: Commerce Dept reports [1/8] narrower-than-expected trade deficit of $42.4 billion in November, tho both exports and imports fell → slowdown in global trade

 

Bellwether earnings/revenue guidance & significant company news:

  • Big banks JPM [1/14], WFC [1/15], C [1/15], BAC [1/19], MS [1/19] report generally in-line earnings and revenue, tho trading environment (esp. FICC) remains a challenge
  • INTC reports [1/14] slightly g-t-e revenue & net income in 4Q15 but warns of impact of economic weakness in China; IBM reports [1/19] lower revenue for 15th consecutive quarter but ↓ in revenue (9%) & EPS (b/c of strong dollar and softness in IT spending) in line w/ estimates

 

Overhanging Concerns for Markets:  Continuation of recent rapid decline in equity prices and price of oil; sustainability of earnings growth b/c of slowing global growth (e.g., China) and impact of stronger dollar on exports and emerging market debt

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