While HBS may be known as a General Management-focused school, many of us have a strong interest in the behavior of financial markets. Whether implicitly (through a 401k) or explicitly (being interested in a career in asset management), we are all tied to the performance of publicly traded securities. Even the rates we pay on our loans are tied to those markets and the events that affect them. Moreover, learning to “read the tea leaves” of these markets can be quite helpful in career planning. For example, the fact that the US yield curve is currently flat (i.e. interest rates for short-term borrowing are very close to rates for long-term borrowing) can be interpreted as a sign of an impending recession. On the other hand, many argue that it is reflective of massive buying of long-term bonds by China. So depending on your interpretation, you may decide to postpone that risky tech start-up project for a few years, or it may in fact prompt you to start a risky China-based venture.
Throughout the course of the year, this column will be included in Harbus to review the performance of financial markets, discuss market sentiment and attempt to identify risks and opportunities. So while there won’t be any recommendations to short oil at $70 or go long the Euro at 1.20, these articles should help keep you abreast of market developments during your busy time at HBS.
After a strong finish in September (S&P 500 +1.6%, Dow Jones Industrial Average +1.9%, Nasdaq +2.2%, CAC 40 +3%, FTSE +2%), US and European markets tumbled last week, completely erasing the previous month’s gains. Inflation fears, expressed by the Fed and reflected in the markets, countered the positive psychological benefits of strong U.S. economic data. Surprisingly, even Korean and Japanese markets, which exhibited incredible momentum year-to-date, were hurt by the prevailing bearish sentiment. In fact, year-to-date through September, the Nikkei had gained close to 20% while the Kospi had risen 36%. But last week, the Nikkei dropped -2.5% and the Kospi -1.6%. What made last week’s pullback worrisome is that in previous global hiccups this year, Japan and Korea had generally traded to their own upward beat amid volatility in Europe and the U.S.
For several months, concerns had been growing about the global economy. High oil prices, combined with natural disasters, were seen as a threat to the economy, particularly in the U.S. Across the Atlantic, sluggish growth, continued unemployment and political uncertainty were seen as threats that could derail the markets. On the other hand, bright spots like Japan were investors’ oasis. Renewed commitment to reforms by the Koizumi government after successful elections, in addition to encouraging economic data (house prices rose for the first time in 10 years), seemed to indicate that Japan might finally be pulling out of its economic funk. Last week was one of the few truly synchronized market downturns in recent months. To make matters worse it took place at a time when retreating oil prices (down 12% since a high of $70.12) should have helped equity prices. Some market veterans are interpreting it as a sign of things to come and are recommending that investors “buckle down” their portfolios with defensive assets. Only time will tell if we have in fact entered a prolonged downturn, or if markets were just taking a breather.
Jean-Philippe (“JP”) Odunlami [MBA 2007, Section A] has been involved with financial markets and investments for over a decade, most recently in the Alternative Investments Group at the JPMorgan Private Bank. Questions, comments, feedback? Feel free to email JP at firstname.lastname@example.org.