What Are Financial Markets?

Broadly speaking, financial markets are places where securities are traded between buyers and sellers. These include equities, bonds, currencies and options to name a few. Financial markets are a cornerstone for capitalist economies, providing both liquidity and capital formation for businesses. Through transactions in securities, investors are able to give their excess funds to borrowers who may need the funds, in exchange for returns on their investment. These securities are traded in a “centralized'' location. This can be a physical location like the New York Stock Exchange or more commonly, an electronic system or exchange. Financial markets are contingent on informational transparency and are subject to strong forces of supply and demand, that should result in fair and efficient prices that reflect the conditions of the overall market and economy.

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Industry Groups and Sectors

Consumer Goods

The consumer goods sector encompasses the businesses which produce goods that households and individuals buy and consume rather than businesses or factories. This sector includes the food and beverage, packaged goods, clothing, and electronics industries. The consumer goods sector includes products which we need on a daily basis but also luxury items, like jewelry or sports cars. It is usually divided between consumer discretionary and consumer staples. Most of the demand for these goods matches the business cycle i.e. when the economy is doing well there is a higher demand for the products in this sector or, alternatively, better quality substitutes of the same products. Given the many substitutes for most products, branding and advertising play an essential role in this sector.

Ongoing Market Color

Within consumer goods, some have thrived under a rise in demand but other sectors have experienced major disruptions to their supply chains. Due to restricted movement and lock downs, there has been a large shift to online consumption.

Tech, Media and Telecom (TMT)

The tech, media and telecom sector encompasses the businesses that develop or focus on new technologies. Sometimes this sector is also referred to as the tech, media, and communications (TMC) sector.  Companies in the TMT sector rely heavily on research and development to continuously create and develop technological goods. Initially, the industry was restricted to computation hardware, semiconductors, and communication technology, but now it also includes anything related to coding and internet services. Since this sector has grown a lot in the past few decades many prefer to refer and analyze developments in the groupings of semiconductors, hardware, software, media, networking and internet, rather than the TMT category as a whole.

Ongoing Market Color

TMT has been one of the leading fighters against COVID-19, providing vital services to deal with uncertain times. Telecom has boomed with people spending more time at home for work and leisure, and new investments are on the way for telecommunications companies, especially in 5G.  IT infrastructure companies have been experiencing disruptions in supply chains, but other verticals, like cloud service providers and software vendors seem to be doing well during the pandemic.

Healthcare

The healthcare sector encompasses all businesses providing medical goods and services. Eating up nearly 20% of GDP, the healthcare sector enjoys distinct advantages in the U.S., such as a strong system for research and development as well as significant government funding. However, in spite of these advantages, the healthcare industry has historically suffered much scrutiny and demand for reform. Many argue that the industry exhibits poorer health outcomes in light of outsized spending as well as economic inefficiencies like price inelasticity (non-negotiable prices) for essential services. Prominent industries within healthcare include healthcare providers (hospitals, medical centers, rehabilitation centers), healthcare financers (health insurance providers), and healthcare manufacturers (pharmaceutical and biotechnology firms).

Ongoing Market Color

Due to COVID-19, there has been a huge surge in demand for healthcare services as patients seek treatment and testing for COVID-19. Hospitals and medical centers have been facing a shortage of Personal Protective Equipment (PPE) and have been urging those with large stockpiles to donate for their healthcare workers. Meanwhile, telehealth and contactless treatment services have gained popularity and diagnostic laboratories have been ramping up production in order to increase the number of tests they can provide for COVID-19.

Industrial Goods

This sector encompasses businesses that are involved in the construction and sale of capital goods. These “capital goods” refer to the equipment used to make consumer goods, as opposed to being sold directly to consumers themselves. For example, the sector includes industries in aerospace and defense, machinery, building products, and electrical equipment. Typically, the industrial goods sector flourishes when there is high demand for building construction, as well as for manufactured products. When the economy undergoes a recession, however, this type of activity significantly declines, as companies postpone expansion and produce fewer goods.

Ongoing Market Color

Industrial goods have been one of the most disrupted industries, bearing supply chain and manufacturing disruptions. Both industrial equipment manufacturers as well as their end customers have been grappling with this difficulty.

Energy

The energy sector encompasses businesses that are involved in the production of energy. Companies are usually classified by the source of the energy they produce and whether it is renewable (biofuels, hydropower, solar power, and wind power) or nonrenewable (petroleum, natural gas, gasoline, diesel, and nuclear energy). Energy companies can be involved in the extraction of fossil fuels, e.g. mining, or in their processing, e.g. chemicals, pipeline, and refining.

Ongoing Market Color

The energy sector felt the impact of the pandemic with a large decline in demand for oil and oil products at the onset of global travel restrictions as well as dropping prices in the wake of the Russia-OPEC price war. In line with the broader equity markets, energy prices have since recovered despite dropping to below zero for the US based crude oil benchmark WTI.

Financials

The financial sector encompasses organizations that are involved in providing financial services to businesses and individuals. As such, it includes banks, insurance companies, and real estate companies. Since many companies in this sector profit from mortgages and loans, the interest rate as well as broader monetary policy play an important role in how much credit these organizations provide. An additional factor that affects this industry is government regulation.

Ongoing Market Color

Throughout COVID-19, credit and debit card spending have declined well over 50%, due to shutdowns and travel restrictions. Investment banks have experienced a surge in demand for investment-grade debt issuance, as companies are looking for a way to raise cash to weather the current pandemic, but equity underwriting has declined as businesses stall plans for initial public offerings until markets stabilize.

Materials

The materials sector encompasses businesses that are involved in the discovery, extraction, and processing of raw materials. Most of the materials are later used for construction but this sector also includes activities like the extraction of gold and the creation of containers made of glass, cardboard, and metal.

Ongoing Market Color

The materials sector has been particularly volatile in line with fluctuations in the global economy, as well as the U.S-China trading relationship. Declines in demand for gasoline, leading to decreased ethanol and corn prices, echo a weakness in overall demand for chemicals which are one of the largest segments within materials.

Real Estate

The real estate sector encompasses businesses that are involved in the buying, selling, and renting of properties. Real estate is usually divided into residential real estate, commercial real estate, and industrial real estate. You can invest in real estate by buying properties or buying products derived from the value of real estate or mortgages through mortgage backed securities (MBS) or publicly traded real estate investment trusts (REITs).

Ongoing Market Color

The real estate sector is facing stiff challenges with social distancing protocols. Due to limited showings and open houses, industry operations have slowed down significantly. Forced closures of businesses and rising unemployment have also impacted cash flow for many individuals who no longer have the means to afford rent and other obligations. This should lead to an increase in evictions and foreclosures, thereby weakening industry performance overall. However, this weakness may present a strong buying opportunity for those institutional buyers who are not as severely impacted by the pandemic and have the ability to invest. In light of this, we may see an increase in acquisition activity in the upcoming months.

Utilities

The utilities sector encompasses businesses that are involved in providing amenities, such as water, electricity, natural gas and sewage. Businesses in this sector are heavily regulated by the government. Because of the nature of utilities and their price stability, companies in this sector tend to do well during recessions but do not perform that well during economic booms.

Ongoing Market Color

Utilities in the United States rely primarily on domestic demand. Overall, the sector hasn’t been impacted significantly by COVID-19 supply chain disruptions. Accordingly, stocks have risen as investors shift their investments to safer and less volatile assets.

*Ongoing Market Color as of June 15, 2020


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