Global Factors That Impact The World of Finance

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The global reach of finance

No one can really be certain where financial markets are headed, a key reason why investors are routinely advised to stay the course and think about economic performance in broad strokes. But many are in agreement that the current state of financial markets around the world is unlike anything seen before, and may necessitate new approaches to age-old challenges. The Master of Science in Finance online program from Northeastern University’s D’Amore-McKim School of Business can provide students with the knowledge they need to succeed in this uncharted territory.

As 2017 winds to a close, a snapshot of the global economy looks quite positive from almost any angle. The U.S. markets in particular, which hold significant sway as the world’s largest economy, continue to break records. October 2017 marked the 12th consecutive month in which the S&P 500 index has posted a net increase in value, something that hasn’t happened since 1935. Since the S&P 500 tracks the performance of America’s biggest publicly traded companies, this is taken as a distinctly positive sign. Other name brand stock market indexes like the Dow Jones and NASDAQ have broken their own records in the last year as well.

With 2017 expected to end on a resoundingly positive note, the U.S. will have gone eight full years without experiencing a significant economic decline. And yet, many analysts and experts still consider the nation, and much of the rest of the world, still in recovery mode since the depths of the global recession that happened nearly a decade ago.

As anyone with rudimentary knowledge of finance will attest, the market moves in cycles, which explains why skepticism is natural and even advantageous in the middle of a prolonged rally. With that in mind, many are hoping they can predict the timing of the next drop in stock prices. Again, this has never been a feat decided by much more than sheer luck, but there are several factors that could change the financial calculus in the coming years:

The Fed and interest rates

In terms of the world’s most powerful financial institutions, The Federal Reserve Bank of the U.S. (also known as “The Fed”) is at the top of the list. That’s why every meeting by its panel of leaders, particularly the Federal Open Market Committee, is the subject of intense scrutiny. In its penultimate meeting before the end of 2017, the FOMC voted to stay the course set by Fed chair Janet Yellen at the outset of the U.S. economic recovery: maintain low interest rates on interbank loans (the Federal Funds Rate) while continuing to sell off its holdings of U.S. Treasury securities at a steady pace.

In theory, these efforts should continue to help the Fed meet its key standing objectives: Ensure the U.S. economy continues to grow at a steady pace, continue to maintain an ideal balance between spending and investment, and keeping inflation as close as possible to a rate of 2 percent annually. By most measures, including the aforementioned stock market performance as well as a low unemployment rate, it appears the Fed has been successful in most of these efforts. But it’s the inflation target that continues to flummox the FOMC board.

Specifically, the Fed continues to view inflation as stubbornly low. According to conventional economic wisdom, the strong economy and low interest rates of the last several years should have brought an influx of cash, and thus net inflation, to the U.S. economy. But according to the most recent Fed data, the inflation rate has hovered around 1.4 percent over the last year. Since inflation makes the price of goods and services rise, consumers have been the beneficiaries of this broad trend. The Fed and other economists, however, view low inflation as a precursor to excessive market confidence, rampant speculation and ultimately a sudden, painful drop in economic activity — all the hallmarks of a recession.

Based on projections made on the record by FOMC members in the September 2017 meeting, there is around a 60 percent chance that the board will vote to raise the Funds Rate for the third time this year when it convenes again in December. While it might only be an incremental change, its ripple effects will be felt throughout the world’s economy and financial markets.

Market volatility and VIX

Financial professionals might not have all the answers to these intricate economic puzzles, but there are a few unique tools they can use to make more informed decisions and predictions. One of the more mysterious to the untrained eye is known as the VIX—an index created by the Chicago Board Options Exchange that aims to quantify overall volatility in financial markets. Although the concept behind the VIX has been around since the mid-1980’s, it’s been essentially off-limits to all but the most elite and sophisticated investors until recently, with the advent of online brokerage services that can deal in such niche products.

The mechanics that make the VIX tick are complex, but it essentially attempts to measure broad market uncertainty and allow traders to bet on it or against it. It can also be helpful for anyone who simply wants to get another perspective on market activity, and it appears to be a decent barometer for that purpose. For example, the VIX has seen two significant surges in its lifetime, both of them in the immediate aftermath of a market crisis: the end of 1987 (the height of the Savings and Loan Crisis) and October 2008 (when the subprime mortgage market began to unravel). As of November 2017, the VIX has been well below these peaks and continues to fall.

While the VIX saw slight upticks before both of these events, it’s still hard to say that it actually predicted or foretold of these or any other serious financial catastrophe. But as it continues to drop slowly, it’s giving some investors greater confidence that the current bull market could continue into 2018 and beyond. Regardless, professionals and armchair analysts alike will be keeping a close watch on the global markets as they look to capitalize on opportunities.

Recommended Readings:
U.S. Department of Labor’s Fiduciary Rule: What Finance Professionals Need To Know
Graduate Programs at the D’Amore-McKim School of Business


Northeastern University’s Online MSF Program