How The 900 Point Drop In The Stock Market Will Affect Businesses

This past Thursday, the stock market officially dropped 900 points which makes the month of October the markets biggest loss since February. The numbers reported are enough to make any investor pull out. While the stocks took a sudden plunge, panic also set in for not only the investors watching but for the business. This comes unexpectedly as the blue-chip stock hit an all-time high. Technology stocks took the majority of the damage in this decline. Here are the ways that this 900-point drop will affect businesses.

Financial health is affected

When investors are looking at a business, many observe the price. When a stock price is firm, this is an indicator of the business’s financial health. A business is determined to be financially feasible by analysts to inform investors by evaluating the financial data and stock price of the business. The stock price is an indicator for determining if the business’s potentials are content or concerned. With the plunge, several businesses are at risk of not being able to raise capital because potential investors are being told by analysts or brokers that this business may not be in their best financial interest. If the stock for the business continues to fall, they could lose their current investors to, which in turn is critical to their financial health and data reports.

The looming risk of a takeover

A takeover of a business is high when the stock price falls. This is a risk because now the business’s stock price is cheaper. This negatively affects businesses because they are not making capital once the takeover is complete. To understand, the public companies can distribute their shares among thousands of shareholders who have the ability to sell whenever they choose. When organizing a takeover, the bidders have a higher percentage of being able to offer a better price to shareholders solely because the trading price is lower.

This is another reason how this 900-point drop will affect businesses. If their prices are on the cheap side and bidders can and will perform a takeover. The problem with this is that the interests that are being protected by management no longer will be because management for the company will be released. This does not apply to just bidders; another business can be keeping an eye on a declining stock price of another business to perform a takeover. The business acquiring the other is able to avoid taking a debt because they have the finances to back the acquisition.

Spending halts

As an investor, people tend to continuously spend more when their stock of the business they are investing in is on the rise. This indicates that the business is in good financial standing and so is their money. The equity markets improves in wealth when people invest in them for the business as the stocks are increasing. The formula is usually increased wealth = increased spending because outside of the stock market, investors, who are most likely consumers of the business, are actively buying the goods or services. The spending increases revenue for the businesses.

The opposite occurs when numbers drop. So, this 900-point drop has affected the equity market, the revenue, the stock price, and the spending habits of the consumers. When a consumer reviews their portfolio and sees a rapid drop in value they are not going to continue their spending habit. As stated above, an increase in spending means an increase in business revenue, but a decrease in spending means the same for the revenue. This is especially true for businesses who sell non-necessity goods and services, such as high-end vehicles or entertainment, which will cause the consumers the willingly relinquish the items if they are suddenly confined to a smaller budget.

Tech companies will be affected by the drop

Tech companies such as Caterpillar, who took the lead in the recent stock market point decline according to the Dow Jones Industrial Average. The shares of such companies as Facebook, Apple, Amazon, and Netflix have been affected also. Unfortunately, Facebook, Twitter, and Alphabet, a Google-parent company, are receiving extreme governing scrutiny from the U.S. government because of the trade fight that is affecting the supply chain from China. This is due to Trump’s stern stance on Beijing. Chris Zaccarelli, who is Independent Advisor Alliance’s CIO (chief investment officer) mentioned that because of the trade war with China, tech businesses will be affected the most and need to be concerned about the rising interest rates.

Experts are chiming in and saying that this point down is a correction and not the beginning of a crash. Businesses are being informed to not panic, and do not time the market.

Fundamental Market Indicators Every Finance Expert Should Know

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Most people want to make money in the stock and bond markets. The markets provide the preferred investment path for retirement savings, emergency funds, and home down payments. But many would-be investors stay on the sidelines. Having seen the heavy losses imposed by market corrections, they choose to keep their money in the bank.

With low-interest rates and inflation an ever-present reality, leaving money in the bank presents the highest risk of all. Inflation will always devalue cash savings, eventually leaving the saver with severely diminished spending power. Just noting the difference in the cost of housing, vehicles, and everyday items over the last few years demonstrate this truth.

The key to successful investing lies in understanding what moves the stock and bond markets. To gain from market appreciation and guard against losses, investors, both large and small, must actively manage their holdings. When indicators show the markets are primed to stay strong, investors should buy more stocks and consider growth-oriented plays. Signs of deteriorating
conditions should signal investors to sell a portion of their holdings and move the proceeds into cash equivalents. The money remaining in stocks should be kept in safer, more conservative stocks that are known to hold up during economic and market declines.

If calling the market’s direction were easy, we’d all invest like Warren Buffet. While no one can predict all of the market ups and down on a daily basis, investment pros are able to read the overall trends in the market and determine when broad increases and declines are imminent. They key is following the fundamental market indicators and knowing what they mean in terms of market direction. Here are the fundamental market indicators every financial expert should know.

Unemployment Reports

Though no single indicator can determine market direction, if one could, the unemployment situation would be it. Employment underpins the American economy. Since the vast majority of Americans receive most or all of their income from employment, a strong economy and a strong stock market are dependent on a low unemployment rate.

As explained in Investopedia, corporate profits rely on strong employment. When large numbers of Americans are out of work, corporate profits decline. People simply stop making non-essential purchases. When the situation gets bad enough, people stop making essential purchases as well.

Part of predicting the direction in the economy rests on understanding the state of the job market. To aid investors, the government releases two jobs reports each month: the household survey on unemployment and the unemployment insurance claims report. The household survey captures a
broader swathe of the job market because it includes those who are ineligible for unemployment insurance; however, because the jobless claims report has a long historical record, its movements can rely on the show the overall state of the job market.

Inflation indicators

As mentioned, inflation is the enemy of any saver. The goal of any investor is to beat the rate of inflation each year. Inflation also moves the market.

The Federal Reserve’s mission is to promote economic growth while taming inflation. As economies heat up, so does inflation. The government wants growth from productivity, not price increases from inflation. Because of this, the Fed tries to keep inflation in check by altering interest rates. When the economy needs a boost, it lowers interest rates. As inflation takes hold, it ups interest rates.

What the fed does with interest rates moves the markets. Investment pros monitor inflation indicators in order to gauge what the fed will do with interest rates. The Consumer Price Index (CPI) indicates the rate of inflation for consumer goods, while the Producer Price Index (PPI) shows inflation in the cost of making goods. Both reports should be monitored. A rise in PPI usually translates into an increase in the CPI as producers pass on their rising costs to
consumers.

Consumer Confidence

How consumers feel about the economy indicates their spending habits in the coming months. Thus, consumer confidence is a leading market indicator. Markets stay strong when consumer confidence is high. When consumers stop spending, corporate profits fall.

To gauge consumer confidence, watch the Consumer Confidence Index (CCI). When this index falls, a weaker market often follows. Retail sales also provide insight.

The Housing Market

Housing is a giant part of the American economy. Smart investors know that the state of the housing market affects the stock and bond markets. Though housing prices and construction activity vary greatly by region, the overall housing market provides clues into the health of the American economy. By watching the reports on housing starts and building permits each month, investors determine the strength or weakness of the housing market.

Investing is a tricky endeavor. No person can call the direction of the market correctly all the time on a short-term basis; however, knowledgeable investors are able to predict broad, long-term trends. The key is monitoring these key economic indicators.

Current Market Indications Point to Potentially Robust Economic Growth in 2018

It has been nearly a decade since the end of the Great Recession. After such a lengthy period of recovery, there are now signs that the US economy is finally poised to experience robust growth throughout 2018. Perhaps most importantly, current market trends have economists especially optimistic about the possibility of pervasive growth, with many analysts expecting a significant acceleration in wage gains.

During the long period of economic recovery that began in 2009, the US economy posted an average growth of 2.1 percent, with 2.9 percent (2015) representing the high-water mark. Due to the expectation of continued business investment and rising consumer spending, analysts are projecting a 2.6 percent rate of growth for 2018, an increase of 0.3 percent from the 2017 projection (2.3 percent). Since the 2018 projection was made prior to the passage of tax legislation, it’s reasonable to conclude that the 2.6 percent figure might approach a full 3 percent.

Of course, these projections never rely on any single market indicator, and a number of recent developments have contributed to the optimistic economic projections for the year ahead. Consumer demand for automobiles, combined with continued technological innovation as well as the recent rally in oil production, has been instrumental in the recovery experienced in the manufacturing sector. With the global economy also growing stronger, other sectors in the US have enjoyed significant benefits as well.

These recent domestic and international gains continue to play an important role in the declining unemployment rate in the United States. At 4.1 percent, the nation’s unemployment rate is the lowest posted in the aftermath of the Great Recession, when the unemployment rate reached 10 percent in 2009 (prior to 2009, it hadn’t eclipsed 10 percent since 1983).

Even at the current rate of 4.1 percent, analysts tend to agree that the downward trend will continue in 2018. This is good news for American workers, as employers will be forced to compete for new hires and will likely adopt stronger policies intended to retain current employees. Employers will also have to seriously consider instituting robust training programs to help fill existing vacancies, which will give American workers the opportunity to expand their skill set without investing in potentially costly academic programs or vocational schools.

It’s these conditions — an ever-tightening labor market at a time when companies have immediate and expanding employment needs — that have economists confident that wage growth with finally experience significant gains after stagnating for nearly a decade. According to current projections, analysts are predicting an increase of 2.5 percent for 2018, with gains growing stronger with each passing month until finally exceeding 3 percent at year’s close.

When wage growth rises at a rate approaching 3 percent, it’s only natural to expect a commensurate increase in consumer spending, which is responsible for approximately 70 percent of the US economy. Consumer spending is expected to increase at a rate of 2.5 percent, and business investment is projected to grow at a rate of anywhere from 4.5 percent to 6 percent or more.

The recent tax legislation is expected to further bolster these projections, although it remains possible that the overwhelming majority of corporations will opt to use the tax cuts to increase dividends or buy back stock rather than investing in employees by increasing wages or expanding benefits.

Although the full economic impact of the recently passed tax cut legislation remains to be seen, economists recognize ample reason for optimism about the possibility of economic growth in the year 2018. The most recent projections for economic growth are supported by a number of critical market indicators, including declining unemployment rates, increasing wage gains, and the likelihood of increased business investment, all of which contribute to the growing confidence in the future of the US economy.

Consumer Credit Grows Record 8.5% in August

This month’s Federal Reserve consumer credit release showed that household borrowing had grown at a seasonally adjusted rate of 8.5% in August, the fastest rate in a year, up from 5.9% in July. The surge represented a $25.9 billion rise in total consumer spending to $3.69 trillion, and occurred as demand for everything from cars to education and credit cards picked up.

Revolving credit grew at an annual rate of 7% to $974.6 billion, while non-revolving credit rose 9%, or $20.2 billion, to total $2.71 trillion. Federal government holdings of student loans comprise the greatest share of non-revolving credit, representing a 38% portion of outstanding credit, while depository institutions and financial companies are the second and third largest, respectively.

Greater willingness to borrow on the part of American consumers, with decent consumer balance sheets, points to confidence about future earnings, driven by steady income and job growth. Indeed, the economy added 156,000 new jobs in September, posting another month of steady gains, although the figure was slightly lower than previously forecast. Unemployment grew slightly from 4.9% to 5% as more discouraged workers re-entered the market looking for work, though overall, unemployment claims remained at 40-year lows. Wages also increased 2.6% in September, compared to a year ago, overtaking the inflation rate.

“It turns out that Goldilocks is real: The labor market is not too hot and not too cold,” says Douglas Holtz-Eakin, a former director of the Congressional Budget Office, according to CNN Money.

In combination, job growth, income growth, and increased household borrowing, all suggest that the consumer discretionary sector, including retailers, car manufacturers, and other domestically-oriented consumer industries, may be poised for a moderate recovery. The increases in the stock prices of GM, Ford, and Gap, also support this view.

References:

http://www.acainternational.org/creditors-consumer-borrowing-grows-at-record-pace-in-august-40633.aspx

http://www.bloomberg.com/news/articles/2016-10-07/consumer-borrowing-in-u-s-rises-by-most-in-nearly-a-year

http://money.cnn.com/2016/10/07/news/economy/september-jobs-report-us-economy/

http://bankingjournal.aba.com/2016/10/consumer-credit-grew-8-5-in-august/

http://www.marketwatch.com/story/consumer-credit-surges-85-in-august-2016-10-07?siteid=bnbh

U.S. Consumer Spending Slows in August, Along With Income Growth

U.S. consumer spending in August slowed to the lowest rate in five months, with income, wage, and salary growth also slowing after four strong months. Adjusted for inflation, purchases fell 0.1 percent in August, following 0.3 percent growth in July. Bloomberg notes that while the slowdown is no cause for panic, given that consumer purchases are the engine driving the American economy, their ups and downs are worth following.

Consumption advanced a respectable 0.4 percent in July and 0.3 percent in June, according to the Commerce Department, and remained unchanged, for the first time since January, during the month of August. Early indications of the drop in real spending could be seen in slowing retail sales and flagging demand automobiles.

Personal incomes also grew just 0.2 percent in August, compared to 0.4 percent in July, marking the weakest income growth since February’s 0.1 percent drop. Wages and salaries increased just 0.1 percent in August after back to back months of 0.5 percent growth. Disposable income, or spending money left after taxes, experienced soft growth of 0.1% in August as well.

“It’s not the worst thing ever,” said Tom Simons, a money-market economist for Jefferies LLC to Bloomberg. “The consumer should come off the sidelines a bit more in coming months. Third-quarter consumer spending should be a little more moderate but still strong, reflecting a solid, healthy base.”

On the other hand, an uptick in hiring, cheaper gasoline prices and groceries, low-interest loans and consumer optimism suggest that consumption will deliver moderate, but healthy contributions to economic growth in the coming quarter. Economists are banking on consumption to lift the GDP growth rate to 3 percent in the current July-September performance.

While consumer confidence grew in September, that reading was at odds with the higher 5.7 percent savings rate that Americans charted in August, as higher savings usually indicate consumer anxiety and a conservative outlook on economic prospects.

References:

http://www.bloomberg.com/news/articles/2016-09-30/engine-of-u-s-economy-down-but-far-from-out-as-spending-slows

http://www.bloomberg.com/news/articles/2016-09-30/u-s-consumer-spending-little-changed-in-august-as-incomes-cool

http://www.usatoday.com/story/money/2016/09/30/personal-income-consumer-spending-economy/91313998/

http://www.nasdaq.com/article/us-consumer-spending-flat-in-august–2nd-update-20160930-00542