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Economic and Stock Market Analysis

Economic and Stock Market Analysis

Investment decisions are informed by the well documented research that covers various components of the economy. These include macroeconomic and microeconomic variables. In making decisions about the stock market, the analyses of the economy, stock market performance, industry, and individual company provide viable information that informs a decision whether to invest or not. The direction of such research depends on an individual researcher. The paper adopts the top down approach, where the economy and stock market are investigated in the chapters below.

Chapter 1: Economic Analysis of the United States

According to the U.S. Department of Commerce (2014), the Gross Domestic Product (GDP) increased by 4.6 % in the second three month period. This was from a decrease in GDP growth by 2.1 % in the first quarter of 2014. The calculation of GDP in this perspective is the value of commodities produced in one year. The values of GDP have adjusted for inflation hence qualifies as real GDP. The growth in GDP is attributed to the growth of exports and investment in inventory. There was also an increased investment in non-residential products, increased spending by federal and local governments.

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There was an increased trend in the order for food and fuel. In addition, there was an increasing demand for residential products. The increased order for goods was as a result of an increase in effectual demand from an increase in the amount of income that people would dispose off. The disposable proceeds of persons in the U.S. in the first three month increased by 3.4 % and rose again to 4.2 % within the quarter. Savings, just as consumption, went up. In the very initial quarter, the savings rate was 4.9 %, while in the second three consecutive months the savings rate was 5.3 %.

This indicates that the economy in the U.S. is in an upward trend. The business cycle is under expansion. The key signs have increased production by firms, consumption by individuals and governments and private savings. The U.S. Department of Commerce (2014) notes that consumer spending added 1.64 % increase in the GDP in the second quarter of 2014, while producers added 1.39 %. Exports added by 1.34 %, while imports reduced GDP by 1.74 %. The governments added 0.33 % to the GDP in the second quarter. Thus, the balance of trade from exports and imports is -0.4 %, while end user spending outstrips local production by 0.25 %.

Within the corporate environment companies showed increase in revenue. The capital investments in the first quarter were $154 billion, while in the second quarter the growth increased to $204 billion. The financial sector showed an increase in profits by 30.6 billion in the second quarter after a decline of $86.2 billion in the first quarter. On the other hand, profits of the non-financial sector increased by $30.6 billion in the second quarter after a decrease of $89.6 billion in the first quarter.

According to the National Bureau of Economic Research (2014), the economy of the U.S is in an expansion state. The economy was at its peak in December 2007 and a trough in June 2009. The economy is yet to reach another peak again. It is in line with cardinal rule of business cycle that states that before any peak there has to be an economic trough. Thus, the economy is on rise towards expansion. The economic depression that began in 2007 to 2009 influenced the Federal Reserve to stabilize interest rates. The Federal Reserve invested in long-term securities and reduced interest rates of the short term. Thus, the economy enjoys low interest rates and low inflation rates. 

Chapter 2: Economic Forecast

The chapter projects the U.S economy in the near short term and long term as projected in 1 year and 1 to 3 years, respectively.

Short-Term Forecast

According to the Congressional Budget Office (2013), the U.S economy is expected to reach its peak in the next year. The economy is expected to grow from 2013 and to 2014 and 2015. However, such growth is below the potential GDP. Therefore, the economy will continue to grow between 2014 and 2015. Within this time frame, the interest rates will remain low, especially on short-term treasury bills. Therefore, consumers and investors have favorable terms of consumptions. The inflation rates are projected to remain low in 2015. However, after 2015 there will be a steady rise in inflation as treasury bills mature. Within the next year, the unemployment rate will be fairly constant.

The financial outlook for 2015 is expected to build on the profits accrued in the 2014. The economy is strong in 2014, especially in the second quarter, whose results were posted in September 2014 by the department in charge of commercial activities in the U.S. The projections of Congressional Budget Office (2013) show that the GDP will grow below the potential GDP with a percentage of margins of about 1% due to strict monetary policy by the Federal government. This is expected especially after the adverse effects of the 2007-09 Financial Crisis.  Therefore, with stable unemployment rates, low interest and inflation rates, the economy in the next year is promising. The real GDP is expected to grow by 2.6 %against a nominal GDP of 4.4 % for 2015.

Long-Term Forecast

The peak of the economy will be reached exactly in 2017 and an economic contraction will commence thereafter. The economic situation in the US in the long run will consistently grow between 2014 and 2017 and increase further in 2018 to the potential GDP. Similarly, projections show that the unemployment rate is likely to reduce within a similar timeframe. The rate is likely to decrease from 7.5 % in 2014 to 5.5 % in 2017. This indicates an increase in disposable income in citizens hence an increased effective demand. With increased demand, firms are bound to produce more and realize more revenue. This is a characteristic of an economic expansion. Consequently, the unemployment rates are expected to decrease after 2017 due to increased expansion of the economy. The economic outlook in the long term encourages increased production since there is the increased consumption from consumers. An increase in disposable income increases demand for non-basic goods.

The interest rates will remain low until 2016 when they are expected to begin to rise. The federal government will be losing its grip as three month bonds mature later in 2016. However, the rates on long-term bonds come even earlier, immediately after 2015. The Federal Government will not only cash in on federal bonds but it will generate revenue from federal assets. The treasury securities will decrease to normal levels while the demand for assets will increase. This increases the demand for loans, and as a result, puts pressure on interest rates in the long run. The inflation rates will rise steady into 2016 before stabilizing at 2 % in 2017-2018. The real GDP is expected to grow by 3.7 % against a nominal GDP of 5.9 % for 2015.

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Chapter 3: Stock Market Forecast

This chapter presents an assessment of stock market in the U.S in the next one year and one to three years.

Short-Term Forecast

The Dow Jones Industry Average provides information about 30 largest companies in the U.S. The price index is majorly watched and provides valuable information about the New York Stock Exchange. Kalestsky (2014) offers prediction for 2014 with the values that run into 2015 since the economic condition are averagely the same. The rates of interest are low in the short run at nearly 0%. The GDP growth was 4.9 %. It has been on upward trend since 2013. Congressional Budget Office (2013) report shows that the GDP is expected to grow in 2015 at a nominal rate of 4.4%, a figure that has already been surpassed in 2014. The prediction was made with an advisory that the GDP was to grow below the potential GDP. Therefore, with a strong economy the stock market will perform positively in the short run even though single digits are predicted. Nevertheless, the growth of stocks will be low due to inflation rates.

There is strong investor interest in the initial public offerings (IPOs). In the third quarter of 2014, 68 companies have registered for listing in the stock market at a value of $38.1 billion. This is promising for investments for late 2014 and early 2015. This number of IPOs is more than the number new companies listed in the first nine months of 2014. It indicates strong investor confidence that is also shown in oversubscription of stocks. The technological and health sectors are the most preferred by investors though caution is driven by global politics and uncertainties in economic growth after the recent economic meltdown in Europe. The financial sector is also another strong option for investors.

In general, the technological sector leads investments in IPOs followed by financial services and lastly health sector. Investments in IPOs are greatly influenced by performance of stocks in the market. The technological, services and financial sectors are the leading market segment for investors for existing stock. For instance, Fidelity Investments (2014) project one year of positive change of 17.30% of health sector, 16.84% for information technology and 12.59% for utilities stocks listed in S&P stock index.

Long-Term Forecast

The stock market will grow with about 6% to 8% in the next decade. As already has been noted, forecasters predict a single digit growth for the stock market. The values after adjustment for inflation approach near zero or could probably be negative. Kalestsky (2014) further notes the gains on stock are yet to be realized in the stock between 2014 and 2017. However, the equity prices are rising, while the prices of bonds are falling. In relation to the global scene, the American economy will be affected by slow economic growth in Japan due to increased taxes. However, the emerging economies and economies of countries in Europe will continue rising after the economic recession.

The number of companies entering the stock market through IPO is high compared to earlier years. The number of companies seeking to enter stock listing is soaring in every economic quarter. The IPOs provide a viable option for raising cash for these companies in the wake of other financial debt financing options. As noted above, technology, finance and health are some of the most promising investment destinations in the future even though the average stock market projections are low.

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Chapter 4: Specific Forecasts for Year End 2014

This chapter presents specific forecasts for the year ending 2014. This includes the real value and real growth of Gross Domestic Product from 2013 to 2014. 

Nominal GDP

The Congressional Budget Office (2013) report shows that the nominal GDP is likely to experience a 3.8 % growth in 2014 from 2.9 % in 2013. As a result, the real nominal GDP in 2013 was at $16.8 trillion, while it is estimated that the nominal GDP will be $16.9 trillion in 2014.

Real GDP

The U.S. Department of Commerce (2014) reports that the real GDP for the year 2013 grew by about 2.7 % in the first quarter, 1.7 % in a three months period beginning in April, 4.4 % in another three months period beginning in July, and finally, 3.5 % in the last three months of the year. The real GDP growth rate decreased by 1.8 % in 2013 and is expected to the average 2% in 2014. In 2014, the real GDP for the year 2014 reduced by about 2.1 % in the first quarter before increasing by 4.2 % in the second quarter. It is projected that the real GDP will grow at 3 % in the third and fourth quarters, respectively. The real GDP for 2013 was $15.92 trillion. The 2014 real GDP stands at $15.99 trillion.

In summary, the paper has revealed that the GDP shorts up by 4.6 % in the second quarter. This was after a decline of 2.1 % in the first three months in 2013. The growth in GDP is associated with increased production and consumption by citizens and governments. In terms of short-term forecast, the U.S economy is expected to reach its peak in the following year. However, the growth will be below the potential GDP. The real GDP is projected to grow by 2.6 % against a nominal GDP of 4.4 % for 2015. In terms of long-term forecast, the economy of the U.S. is expected to grow between 2014 and 2017 consistently and increase further in 2018 to the prospective GDP. The real GDP is expected to experience a 3.7 % growth against a nominal GDP of 5.9 % for 2015 to 2018. 

Also evidenced is that the country is equally expected to do well in the stock market. It is projected that in the short term, with a strong economy, the stock market will perform positively in the short run, even though single digits are predicted. There is strong investor interest in initial public offerings (IPOs). In the long run, the stock market will grow with about 6% to 8%. As already noted, forecasters predict a single digit growth for the stock market. However, the equity prices will rise while those of bonds fall. Nevertheless, technology, finance and health are some of the most promising investment destinations.

In conclusion, the economic and stock market review indicates minimal returns to investments in the stock market. However, these are stock market averages capped with inflation rates in the U.S. Nevertheless, there are industries that are quite promising for investment in the stock market, such as health, technology and finance.

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