It is no secret that the daily, even hourly performance of the global stock, bond, derivatives, and goods exchange has a major impact on people around the world. The Great Recession woke up the U.S. and other Organization for Cooperation and Economic Development (OECD) nations to the reality that government and consumer ignorance of the global banking and trading sectors still leads to massive economic breakdowns on an incomprehensible scale. While current unemployment rates (5.5 percent as of May 2015) and Federal Reserve policies have sparked an inclination of macro-stability, recent events allude to Wall Street’s declining state.
The most obvious perpetrator of current woes and banking concern is the global petroleum market. Just two years ago a barrel of crude oil sold at barely over $100; compare that number with today’s price of $33 per barrel and the result is a 67 percent decline in prices. Gasoline is a key economic indicator. It is a mass commodity, and when its price goes up investors flock to companies like Exxon, Shell, and Total, seeking relatively stable stocks with potential for secure returns. Yet, when crude prices drop in such an unprecedented manner, as they have over the past year, so do share prices. A glimpse at Exxon’s share price shows a general decline from over $100 to nearly $80 a share between 2014 and 2016. The whole oil industry exhibits the same declines. Furthermore, cutting employees and reducing production facilities have generated turmoil in the markets. Even with recent announcements by Saudi Arabia and Venezuela, who stated their production levels would be held at January levels, the end of Iranian sanctions and revamping of the Iranian petroleum industry will likely offset some of the supply freeze, thus leaving prices low. Those invested in indexes with these companies have seen their asset values fall, and investors have virtually no say on the strategic decisions the oil companies make next.
As prices at the pump have fallen, consumers have gained, but there does not appear to be an uptick in consumption. In fact, according to Federal Reserve data, between November and December there was a 0.3 percent decrease in personal consumption. On the one hand, less consumption leads to greater savings and allows Wall Street to create more debt-backed derivatives offering high returns. On the other, less consumption leads to lower quarterly reports from industry drivers. Lower reporting creates investor and trader concern. These problems lead to disruptions in management and board structure and create further downturn in share prices.
While traders and wealth managers have not gained much in reputation since the Great Recession, their analytical and research methods have only improved with technological innovation. This advancement translates to greater reliance on economic indicators, and live updates and speculations spread instantaneously through financial-social networking. More accurate updates on global oil policy ensure traders can make instantaneous swaps and take future positions based less on speculation and more on real insight. With the current oversupply of oil, this knowledge will likely lead to petroleum-based stocks continuing their downward spiral.
The second major indicator of the recent downturn is the Chinese market and government policy. Economic forecasts for China are anything but positive. January 2016 saw the greatest amount of debt ever issued in China: a staggering $500 billion. Why does this matter? First off, China’s (shrinking) position as the most populated nation along with restrictive government policy leaves it as a largely untapped consumer environment. It was only a few years ago that China rose as an emerging market and technology and commodity firms appeared to profit off the large consumer base. Firms relying on Chinese growth to increase revenue will only be harmed as China eventually deleverages and their economy drops into lower growth levels and a potential recession.
China is also the largest holder of U.S. debt. The People’s Republic maintained a practice of trading America’s current account deficit dollars for treasury bonds and private assets throughout the 2000s. This connection created potential for a domino effect in market fluctuation. Simply, China is in a period of readjustment, which does not lead to increased investment and growth. Therefore, as China’s economic position declines, its ability to continue funding U.S. consumer habits may degrade as well. This shift would drive down U.S. stock indexes as company profits fall and investors move toward lower risk investments.
Over the past few months, the U.S. market has felt the tidal wave of China’s stock market crashes and depressed growth. Until stabilization hits an endpoint, one could not expect any Chinese-dependent financial instruments to have impressive yields.
The third and final indicator of the financial regression is the various central bank responses. The U.S. Federal Reserve recently announced a rise in interest rates due to confidence in GDP growth, low unemployment rates, and general recovery from the Great Recession. Comparing this monetary policy to those announced in the Eurozone and Japan presents two completely different scenarios. The latter areas have recently introduced negative interest rates. Rather than paying commercial banks when they place their money inside central bank reserves, commercial banks are being charged a fee to leave their funds in these reserves. The goal of these policies is to stimulate economic growth: if banks are charged to place their money in reserves, they should have greater incentive to lend out funds to consumers. Yet, unlike commercial banks, the central bank cannot act as a market intermediary to provide consumer loans and financial instruments. Therefore, a big pool of money would grow as liquidity shrank. This effect could potentially slow domestic growth, yet another signal for investors to pull money from the markets.
In addition, Janet Yellen and other Federal Reserve chiefs do not appear to agree with this relatively novel monetary policy tool. Were the U.S. to employ such a radical strategy, Wall Street would most likely react negatively. Disincentive to save is not necessarily a trend that would bear well in a post-recession U.S. economy. Current Federal Reserve policy will likely produce stabilization, and if market conditions continued to dissolve, another round of quantitative easing would most likely ease tensions.
The number of potential economic indicators is endless. Wall Street traders and everyday investors should be doing their research in whatever industry they have placed their bets. But if one wants a general view of how markets could react, reading headlines regarding oil, China, and central bank policy will help people make safe investment decisions and maintain steady economic growth. In fact, the more educated America’s investment community becomes, the less panic will occur. When investors understand current trends and have some sense of future instability, they will have a greater chance to make moderate investment transitions. These steady changes do not result in financial tumult; instead, they facilitate alterations the jobs market can adjust to and financial markets can absorb.