The History Of The Modern Business World

Published Date: 02 Nov 2017

The world of finance is no exception. Once hindered with barriers to trade, we are now seeing a global market of securities; that play a key role to drive whole economies to seek growth and prosperity for the current and future generations.

The S&P 500 is one of the most commonly used benchmarks for the overall U.S. stock market. The Dow Jones Industrial Average (DJIA) was at one time the most renowned index for U.S. stocks, but because the DJIA contains only 30 companies, most people agree that the S&P 500 (which includes 500 of the top American companies) is a better representation of the U.S. market. In fact, many consider it to be the definition of the global market not only because it comprises both growth stocks and the generally less volatile value stocks but also because what happens financially in the US, has significant implications on other countries as well.

The late 1990s brought on rapid advances in technology along with the introduction of the dot-com era. As figure A below shows, the S&P 500 index reached an all-time intraday high trading during the dot-com boom, attaining its maximum mark of 1552.87 on March 2000, and then lost approximately 50% of its value in the following two-year bear market. It squashed below the 800 mark during this stock market downturn of 2002.

In mid-2007 difficulties stemming from subprime mortgage, lending began spreading to the wider financial sector, resulting in the second bear market of the 21st century. The intensifying crisis became acute in September 2008, ushering in a period of unusual volatility. On November 2008, the index closed at 752.44, the lowest since early 1997. That year-to-date loss was the greatest since 1931, when the broad market declined more than 50%. The market continued to decline between late 2008 and early 2009 because of the financial crisis of 2008. Subsequently, the index recovered sharply with the Federal Reserve quantitative easing (QE) to close at 1,206.07 on December 2010. In 2011, however, there was the smallest annual market move for the S&P 500 since 1950. By the end of 2011 the index was just at the 1257.60 mark.

Comparing the S&P 500 with DJIA (figure B above) one may remark that the S&P 500 has remained beneath the DJIA from the year 2002 onwards. Nonetheless, although both indices have the same swings and have been affected in the same way by the main events, the DJIA had a quicker recovery from the year 2000 onward.

In order to study the performance of equity markets in Europe we decided to consider and examine the flow of two major European based stock markets i.e.

The FTSE 100 Index, also called FTSE 100, FTSE, or, informally, the "footsie" is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is one of the most widely used stock indices and is seen as a gauge of business prosperity. The index is maintained by the FTSE Group, a subsidiary of the London Stock Exchange Group.

The index began on 3 January 1984 at the base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. After falling during the financial crisis of 2007-2010 to below 3500 in March 2009, the index recovered to a peak of 6091.33 on 8 February 2011, it’s highest since mid-2008. It fell under the 5000 mark on the morning of 23 September 2011. As of 21 October 2012 it was at 5896.15.

The DAX (Deutscher Aktien Index) is the German stock index consisting of the 30 largest German companies trading on the Frankfurt Stock Exchange and its basis is the "floor" trade (Parketthandel). These 30 German companies are measured as regards their performance on the DAX index in terms of order book volume and market capitalization. Examples are Adidas, BMW, Lufthansa, Allianz and Volkswagen Groups. Options (ODAX) and Futures (FDAX) are also offered on the DAX. The Base date for the DAX is 30 December 1987 and it was started from a base value of 1,000. The Xetra electronic-trading system calculates the index after every 1 second since January 1, 2006.

When one examines the performance of these two indexes one can mark different stages which are very much related to situations and events concurrently happening in the Western world. This in a way is a clear confirmation that the European markets are very much correlated to the Western World. There appear to be 4 distinct phases.

1997- 2000

The years prior to 2000 were great years for the market and many investors acted as though bad markets had been a thing of the past. This was the time of the dot.com boom. Alan Greenspan Chairman of the US Fed Reserve had already in 1995 warned that investors were exhibiting "irrational exuberance’". His warnings were ignored and the market forged ahead.

2000 - 2003

In 2000 Greenspan’s predictions were proved right; the bubble started to leak and the market started a slow decline downwards. Initially it fell by 10% and since markets are correlated the DAX an FTSE 100 responded likewise. On Sept 11 2011 Terrorist attacks hit the World Trade Centre and stocks fell another 14 % since the markets reacted to a siege mentality. Finally in 2002 fears of another attack, the subsequent uncertainty brought about by the War on Terrorism (Afghanistan and Iraq) and a US recession ensured that there was a further decline of 24 %.

2003500

-2007

The European and Western Markets rebounded when it became evident that the investors had overreacted. Markets rose by 24% and the trend remained right up to 2007. The US Fed continued to cut interest rates making borrowing cheaper and fomenting a bull market. There was a strong economy and good profits. However in 2007 trouble stared brewing in the form of the sub-prime crisis. The low interest rates and the trading of CDO’s linked to the sub-prime mortgages had created a de-balance in the lending of money. Large banks started to write off billions worth of dollars of bad loans. To make matters worse there were price hikes in fuel prices when oil prices hit $100 a barrel.

2007-2012

Following a peak in 2007 the markets entered a pronounced decline, which accelerated markedly in October 2008. Many established US Banks became insolvent The US Federal Reserve, Treasury, and Securities and Exchange Commission took several steps to intervene in the crisis. For example, the US treasury announced a new $50 billion program to insure investments. This was similar to the Federal Deposit Insurance Corporation FDIC programme and served to stop the potential run on money market mutual funds. Analysis contends that the Federal Reserve's aggressive policy of quantitative easing spurred the partial recovery in the stock market. However the crisis caused a European contagion and it rapidly developed and spread into a global economic shock.

Further declines were experienced in the European stock markets; there were large reductions in the market value of equities. Most European countries suffered recession and there were a number of European Bank failures. World political leaders, national ministers of finance and central bank directors coordinated their efforts to reduce fears and for the first time there was the need to secure bail outs for several countries in the Euro Zone who had problems with sovereign debt.. This in part contributed in stopping the haemorrhage. Against the backdrop of weakening global economic activity, U.S. stocks rallied sharply in the third quarter of 2012. The S&P 500 Index rose more than 6%, driven largely by the latest bond-buying programs by the U.S. Federal Reserve and the European Central Bank, as well as impending stimulus from the Chinese government.

For the period Sept 1997 to Sept 2012, the DAX index was compared with that of S&P 500. The DAX in general moves with the S&P 500 although the diversifications of the S&P 500 stocks, display lower performance volatility. The volatile trends of the DAX can also be attributed to the fluctuations in the exchange rate Euro vs Dollar. In 1998 €1= $1 =, in 2001 €1 = $0.82 while in 2012 €1 = $1.30. So the DAX volatility reflect the currency induced price fluctuations of the DAX listed shares in terms of their value in US dollars. Furthermore trading in European stocks produces more volume since such stocks are less expensive than their US counter parts. With the same investment typically one can buy more European shares than US shares; e.g.

DAX ------- BMW shares cost €50 ; capital investment available €10000 = 200 shares

For the period Sept 1997 to Sept 2012, the FTSE 100 index was compared with that of S&P 500. Again there is a common trend for European stock markets to move with the US markets. The FTSE in general moves parallel with the S&P 500; again the diversifications of the S&P 500 stocks, display lower performance volatility. The FTSE stocks are also less volatile compared with those of the DAX; this is due to the fact that the exchange rate British Sterling vs the US Dollar remained relatively stable during the period in question.

The Hang Seng Index is a market capitalization weighted index that follows the top 40 or so companies that trade on the Hong Kong Stock Exchange, these companies are classified into subcategories of finance, commerce and industry, properties and utilities. The index covers over 65% of the total market capitalization of the exchange. Since the Hang Seng Index is used to record and monitor daily changes of the larger companies of the Hong Kong Stock Market, it is the main indicator of the overall market performance in Hong Kong. This index was started on November 24, 1969, and is currently compiled and maintained by Hang Seng Indexes Company Limited, which is a wholly owned subsidiary of Hang Seng Bank, one of the largest banks registered and listed in Hong Kong in terms of market capitalisation.

The Nikkei 225 Stock Index maps companies on the Tokyo Stock Exchange. It is the oldest and the most well known Asian index in the world. It began to be calculated on September 7, 1950, retroactively calculated back to May 16, 1949. Currently the Nikkei is used as the major indicator for the Japanese economy, similar to the Dow Jones Industrial Average (DJIA). However unlike the Dow Jones, as the Nikkei 225 is designed to reflect the overall market, there is no specific weighting of industries. On the Nikkei 225, stocks are weighted by giving an equal weighting based on a par value of 50 yen per share. Events such as stock splits, removals and additions of constituents impact upon the effective weighting of individual stocks and the divisor. The Nikkei 225 is designed to reflect the overall market, so there is no specific weighting of industries. Components of the Nikkei 225 range widely and include foods, mining, pharmaceuticals, banking, insurance and trading companies.

During 1998, the world economy has entered a slowdown, which originated in South East Asia. The East Asian Financial Crisis was a period of economic unrest that started in July 1997 in Thailand and South Korea with the financial collapse of KIA and affected currencies, stock markets and other asset prices in several Asian countries. This crisis started overnight as the Hang Seng Index plummeted 6%, however Nikkei 225 only fell by 2%. The S&P500 fell 6.86%, this shows that the Asian crisis had also started affecting the U.S.

Indonesia, South Korea and Thailand were the countries most affected by the crisis. Hong Kong, Malaysia, Laos and the Philippines were also hit by the slump. Mainland China, Taiwan, Singapore and Vietnam were relatively unaffected. In fact in Figure A above we can see that the Nikkei 225 continued with the same performance throughout 1998 and 1999, while Hang Seng had a relatively big downturn in 1999. Although Japan was not affected much by this crisis, it was going through its own long-term economic difficulties due to the housing bubble. All nations mentioned above saw their currencies dip significantly.

September 11, 2001 attacks:

The Asian markets quickly tumbled Wednesday in the wake of the terrorist attacks in the U.S. One saw Nikkei 225 Index sinking as low as 9604.40, it was the first time it had been below 10,000 since August 1984. By midday the Nikkei had stabilized slightly to be down 5.04 percent at 9,773.71. Like Tokyo, Hong Kong’s Hang Seng Index crashed through the 10,000 barrier. It was down 7.7%, losing more than 800 points to be at 9,609 at about 10:45am. In fact this is also pictured in Figure A above.

Late-2000s recession:

In January 2008 Chinese stock markets tumbled as worldwide worries about an imminent US recession led to panic selling, on a scale never seen since the 2001 September 11 terror attack. On September 2008, a widespread financial crisis became evident when the Lehman Brothers went bankrupt. It triggered a global credit freeze that led to the worst financial crisis since the Great Depression in the 1930s. Investor confidence continued to erode as Lehman’s stock lost roughly half its value and pushed the S&P500 down by 3.4% on September 9th 2008. The Hang Seng Index lost 5.4% to its lowest point in nearly two years, and the Nikkei 225 Index sank nearly 5% to 11 609.72, its lowest close since July 2005.

As shown in Figure A, in October 2011 U.S. stocks ended the month with steep losses. Investors were worried about the missing details in Europe’s plan to contain the Greek debt crisis. The same happened with the Hang Seng Index which fell 4.4% to 16 822.15; its lowest close since May 2009. On the other hand the Nikkei225 fell 1.8% to 8 545.48.

This shows that shocks in the U.S. markets spread rapidly in the Asian markets. One can say that the U.S. is the major global information producer and exerts dominant influence in the markets of the rest of the world. However the Asian Financial Crisis did not affect a lot the U.S. which shows that although Asia is also a big continent, it did not affect much the strength of the U.S.