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Economy currently outperforming expectations
Sorenson 9/28
[Brad Sorenson, Head of Market and Sector Analysis for the Schwab Center for Financial
Research, and a member of Schwabs Investment Strategy Council, Financials Sector Rating:
Outperform, Sept. 28, 2017, https://www.schwab.com/resource-
center/insights/content/financial-sector -SJT]
Market outlook for the financial services sector The financial sector has been volatile as of late, largely reacting to changes in yields.
The recent rebound in yields, especially at the short end of the curve, helped financials. To those investors frustrated with the
groups volatility, weurge patience as we continue to believe a tight labor market and solid economic
growth should result in a steeper yield curve over time, which we believe would add to the
positives we currently see in the financial sector. Consumer and corporate balance sheets
appear to be improving and are in substantially better shape than they were in 2008. Corporate
cash balances are high and household debt service as a percentage of disposable income has
fallen, although it appears to be stabilizing. Mortgage demand also appears to be healthy. Interest rates
continue to be relatively low and the high rental rates in some areas of the country provide
incentive for home buying. We still have concerns, as changes in Washington are sometimes tough to come by and there
has been some volatility in financial shares recently that could raise concerns among investors. However, with balance sheets
solidified, financial companies have already been freed from some regulatory restrictions. Additionally, according to data compiled
by Cornerstone Macrothe
financial regulatory burden has been reduced in 2017. Additionally, the
negative interest rates seen recently in much of the world are reversing somewhat and the
recent move by the Treasury Department to rewrite some of the Dodd-Frank legislation could
benefit the financial sector. We are watching all of these developments closely, as a sustained flattening of the yield curve,
such as weve seen signs of lately, or foreign interest rates slipping deeper into negative territory could threaten our outperform
rating. We maintain relative confidence in the ability of the financial services industry to reshape itself and adjust to the changing
environment, and believe now it is gaining the ability to do so, leading to our outperform rating.
tend to serve shorter terms and reenlist at lower rates. Training costs are therefore higher, and increased
training time means less operational performance time. During the draft era, about one in eight stayed after his first term; with the
volunteer force, closer to one in two wants to stay . A volunteer force is also more motivated. People perform better when their service is
voluntary as opposed to coerced.
The second scenario, called Mayhem and Chaos, is the opposite of the first scenario; everything
that can go wrong does go wrong. The world economic situation weakens rather than
strengthens, and India, China, and Japan suffer a major reduction in their growth rates, further
weakening the global economy. As a result, energy demand falls and the price of fossil fuels
plummets, leading to a financial crisis for the energy-producing states, which are forced to cut
back dramatically on expansion programs and social welfare. That in turn leads to political
unrest: and nurtures different radical groups, including, but not limited to, Islamic extremists.
The internal stability of some countries is challenged, and there are more failed states. Most
serious is the collapse of the democratic government in Pakistan and its takeover by Muslim
extremists, who then take possession of a large number of nuclear weapons. The danger of war
between India and Pakistan increases significantly. Iran, always worried about an extremist
Pakistan, expands and weaponizes its nuclear program. That further enhances nuclear
proliferation in the Middle East, with Saudi Arabia, Turkey, and Egypt joining Israel and Iran as
nuclear states. Under these circumstances, the potential for nuclear terrorism increases, and the
possibility of a nuclear terrorist attack in either the Western world or in the oil-producing states
may lead to a further devastating collapse of the world economic market, with a tsunami-like
impact on stability. In this scenario, major disruptions can be expected, with dire consequences
for two-thirds of the planets population.