Month: April 2018

Hello everyone! Welcome back to a new week of economic knowledge. I’m going to enlighten you this week with the yield curve. Very few probably heard about this concept, but it is a very important indicator to economists.

A yield curve is a line that plots the interest rates of bonds with differing maturity dates. It is vital to compare bonds with the same credit rating. For instance, let say company A has a grade C bond, it should only be compared with another company with a grade C bond. This is due to riskier companies have higher yields to compensate for the risk.

Many analyst used the benchmark for other debt in the market. For instance, a financial advisor may compare a 30 US Treasury bill to a 30 year mortgage rate. Another important usage of the yield curve is to predict changes in economic output and growth.

The yield curve takes 3 main shapes: normal, inverted, and flat. The shape gives economists and analysts the idea of future interest changes and economic activity. Let’s discuss the differences between the shapes and what they indicate.

A normal yield curve is upward sloping, which determines that longer maturity bonds have a higher yield compared to shorter-term bonds. The yield curve also indicates the yields on longer-term bonds may continue to rise due to periods of economic expansion. Although holding longer term maturity debt gives you a better return, you are susceptible to interest rate risk. In a rising rate environment, which we are in now, the value of your longer term bond will decrease. Therefore, many investors will sell off their longer term bonds and purchase shorter term securities.

An inverted yield curve is downward sloping, which determines that short-term yields are higher than the longer-term yields. The yields of longer-term securities may continue to respond due to periods of economic recession. The yields on longer-term securities could be trending down when market interest rates are forecasted to get lower for a foreseeable future to accommodate ongoing weak economic activities. Therefore, businesses and governments can acquire investment capital at lower costs. As a result, an increase in investments can jump start a weak economy.

Finally, a flat yield curve demonstrates that shorter-term bonds and longer-term bonds are very close to each other. A flat yield curve can arise from normal or inverted yield curve, which indicates an economic recession. When the economy is transitioning from expansion to recession, yields on longer-maturity tend to fall and shorter-term securities are likely to rise. On the other hand, economy getting jump started into an expansion from weak economic development will drive longer-term bonds to rise and shorter-maturity securities to fall.

Our economy is currently in an economic expansion, but the yields on longer-term maturity are decreasing. Does this mean we are heading into a recession?

 

Unless you’re living under a rock, you have been noticing the stock market has been tanking. Ok that is outrageous for me to say. Only a economics nerd would know this stuff. You’ll probably have more exciting and better things to do.

Now back to the topic of the stock market. It has been demonstrating volatile swings due to the recent bombarding of news. From the previous posts, we learned the efficient market theory incorporates readily available information and displays into the stock price.

You must be wondering what news was just released? Well the Technology sector was slammed recently, which was the main driver of the the downfall of the stock market. The NASDAQ, which is a tech-heavy index, has fallen 2.74%. This essentially eliminated all the gains the sector has made in the beginning of the year.

Let’s dissect why the technology has been failing over the past two weeks.

Facebook has been under scrutiny by the government and the public. Facebook users are wondering if they can trust this social media company with their privacy and information. Facebook’s data was breached the political consulting firm Cambridge Analytica. This firm abused this data to optimize their algorithms to better target their audience. As a result, Facebook stock fell 2.75% due to the failure of protecting their consumers’ information.

Another technology company that has been criticized is Snapchat. This alternative picture delivering social media updated their app in the beginning of the year. From a business perspective, it was a brilliant maneuver to boost advertisement revenue. However, from a consumer satisfaction perspective, it was a disaster. Users complained about the new design and found it annoying to use. As a result, Snap went down 8.83% because they forgot to consider their customers in their new update.

Your favorite online website Amazon has been attacked by President Trump due to abusing the deal with United States Postal Service. Although USPS is profiting from the deal, good ole Donald wants the country’s mail delivery service to charge corporate giant more money on each package. Amazon’s stock decreased by 5.21% as people expect more government regulation on this company. The increased regulation can lower Amazon’s expected earnings.

The electrifying car brand Tesla faced several problems recently. First, the company witnessed its first semi-autonomous car accident, which was forced to halt operations. The public was scared by this news as they see autonomous driving as a danger to public health.  Another big issue is Elon Musk alerted investors the company is going to miss the Model 3 production target. These two detrimental situations dropped Tesla’s stock price by 5.13%.

The list can go on as other tech companies have been struggling. Ultimately, technology’s sector poor performance drove the NASDAQ and Dow Jones down.