The most important financial center in the world? A place of fabled silver spoons and golden parachutes? A center of brutal capitalism? Or all of the above. Wall Street is many things to many people, and what you really know about it depends on who you ask. While perceptions of Wall Street may vary widely, there's no dispute that it had a lasting impact not just on the U.S. economy, but on the global economy as well.
In Manhattan, New York City, Wall Street actually occupies only a few blocks, less than a mile; yet, its influence is global. The term "Wall Street" originally referred to some of the large independent brokerage firms that dominated the U.S. investment industry. But as the lines between investment banks and commercial banks have blurred since 2008, in current financial terms, Wall Street is an umbrella term for many players in the US investment and finance industry. This includes the largest investment banks, commercial banks, hedge funds, mutual funds, asset managers, insurance companies, brokers, currency and commodity traders, financial institutions and more.
While many of these entities may be headquartered in other cities, such as Chicago, Boston, and San Francisco, the media still refers to the US investment and financial industry as Wall Street or simply "Wall Street." Interestingly, the word "Wall Street" is synonymous with the investment industry in the United States, and similar "streets" appear in certain cities where the investment industry gathers, such as Bay Street in Canada and Dalal Street in India. Street).
The United States is the largest economy in the world, with a gross domestic product (GDP) of $21.4 trillion in 2019, accounting for 24.8% of global economic output. It is 1.5 times the size of China's second largest economy (2019 GDP = $14.14 trillion). The US is somewhat the largest in the world in terms of market capitalization, accounting for 40% of global market capitalization (as of August 2018). The Japanese market is far ahead, accounting for just over 7.5% of global market capitalization.
Wall Street has such a major influence on the global economy because it is the trading center of the largest financial market in the richest country in the world. Wall Street is home to the well-respected New York Stock Exchange (NYSE), the undisputed global leader in terms of average daily trading volume and total market capitalization of the companies it lists. The Nasdaq Stock Exchange, the world's second largest exchange, is also headquartered on Wall Street.
Wall Street affects the U.S. economy in many ways, the most important of which are:
Wealth Effect: A buoyant stock market has a "wealth effect" on consumers, although some leading economists assert that this effect is more pronounced during a housing boom than during a bull market. But it seems logical that when the stock market is hot, and when their portfolios are earning handsome gains, consumers might be more inclined to invest in big-ticket projects.
Consumer Confidence : A bull market typically occurs when economic conditions are favorable for growth and consumers and businesses are confident about future prospects. When their confidence is high, consumers tend to spend more, which boosts the U.S. economy, since consumer spending accounts for about 70 percent of the U.S. economy.
Business Investments : During a bull market, companies can use their expensive stock to raise capital, which can then be used to acquire assets or competitors. Increased business investment leads to higher economic output and more job creation.
The stock market and the economy have a symbiotic relationship, with one driving the other in a positive feedback loop during good times. But in times of uncertainty, the interdependence of the stock market and the economy as a whole can have serious negative consequences. A sharp decline in the stock market is considered a harbinger of recession, but it is by no means a reliable indicator.
For example, the Wall Street Crash of 1929 caused the Great Depression of the 1930s, but the 1987 crash did not trigger a recession. This contradiction led to Nobel laureate Paul Samuelson's famous statement that the stock market had predicted nine of the past five recessions.
Wall Street drives U.S. stocks, which in turn are bellwethers for the global economy. The global recessions of 2000-02 and 2008-09 were both produced in the US, the bursting of the tech bubble and the collapse of housing respectively. But Wall Street can also be a catalyst for global expansion, as two examples from this millennium show. The 2003-07 global economic expansion began with a huge Wall Street rally in March 2003. Six years later, in the worst recession since the Great Depression of the 1930s, Wall Street rebounded sharply in March 2009, and the economic abyss began to pick up.
The prices of stocks and other financial assets are based on current information that is used to make certain assumptions about the future, which form the basis for estimating the fair value of the assets. When economic indicators are released, the impact on Wall Street is usually minimal when measured as expected (or so-called "consensus expectations" or "average analyst estimates"). But if it's much better than expected, it could be positive for Wall Street; conversely, if it's worse than expected, it could be negative for Wall Street. This positive or negative impact can be measured by changes in stock indexes, such as the Dow Jones Industrial Average or the S&P 500.
For example, assuming the U.S. economy is in a downturn, the jobs data due on the first Friday of next month is expected to show that the U.S. economy created 250,000 jobs. But when the jobs report came out, it showed that the economy had only created 100,000 jobs. The weak jobs data could lead some economists and market watchers on Wall Street to rethink their assumptions about the future growth of the U.S. economy, despite a lack of trend. Some Wall Street firms may lower their forecasts for U.S. economic growth, and strategists at these firms may lower their targets for the S&P 500. Large institutional investors who are clients of these Wall Street firms may opt to exit some long positions after receiving the downgraded forecasts. Such a sell-off on Wall Street could send stock indexes sharply lower on the day.
Most mid-sized to large companies are covered by several research analysts employed by Wall Street firms. These analysts have in-depth knowledge of the companies they cover and are sought after by institutional "buy-side" investors (pension funds, mutual funds, etc.). their analysis and insights. Part of an analyst's research job is devoted to developing financial models for the companies they cover and using these models to provide quarterly (and annual) revenue and EPS forecasts for each company. The average of analysts' quarterly revenue and earnings per share (EPS) forecasts for a company is known as "Wall Street Estimates" or "Wall Street Estimates."
So when a company reports its quarterly results, if it reports revenue and EPS in line with Street estimates, the company is said to have met Wall Street estimates or expectations. But if the company beats or misses Wall Street expectations, the stock price reaction could be huge. Companies that beat Wall Street expectations typically see stock prices rise, while companies that disappoint can see their stock prices plummet.
Some criticisms of Wall Street include:
It's a rigged market: While Wall Street operates fair and square most of the time, Galleon Group co-founder Raj Rajaratnam and several SAC Capital Advisors ) conviction on insider trading charges has reinforced the view in some circles that markets are manipulated.
It encourages unjust risk-taking : Wall Street's business model encourages distorted risk-taking because traders can make huge profits if leveraged bets are right, but don't have to take huge losses if they're wrong. Excessive risk-taking is believed to have contributed to the collapse of mortgage-backed securities in 2008-2009.
Wall Street Derivatives Are Weapons of Mass Destruction : Warren Buffett warned in 2002 that derivatives developed by Wall Street were financial weapons of mass destruction, and it turns out that during the U.S. housing market crash, mortgage-backed securities There was a free fall.
Wall Street can bring the economy down as discussed earlier, as seen in the Great Recession of 2008-09.
Too big to fail, bailouts need taxpayer money : Big Wall Street banks and corporations deemed "too big to fail" need taxpayer money if they need bailouts.
Disconnected from Main Street : Many people see Wall Street as a place where unnecessary middlemen abound and make good money even though they don't add value to the real economy the way Main Street does.
Wall Street inspires envy of some and anger of many : Wall Street's fairly common million-dollar payouts inspire envy of some and anger of many, especially after the 2008-09 recession. Occupy Wall Street, for example, claimed in its manifesto that it "is fighting back against the corrosive power of major banks and multinational corporations in the democratic process, and the role of Wall Street in creating an economic collapse that caused the worst recession in generations."
Wall Street is made up of the largest stock exchange, the largest financial firms, and employs thousands of people. As the center of trade for the world's largest economy, Wall Street has a lasting impact not only on the U.S. economy, but on the global economy as well.
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