Technology’s Impact on the Financial Systems and the Stock Markets Milton H. Marquis Florida State University
Financial System • • • • •
Role: Process Information Driven by Innovations in IT 24/7 Trading Global Markets Interconnected Financial Transactions on the Internet – Payments – Investments – Credit Histories/Availability of Credit
Equities Markets • Open Outcry/Specialist Auction Market: Is It Becoming Anachronistic? • Volume of trading on NASDAQ vs NYSE • Multiple Listings • Attempted Mergers in Exchanges
Household Wealth • Contribution of Equities -- Mutual Funds -- Pension Funds • Contribution of Housing -- Refinancing -- Home Equity Lending
Economy-wide Household Balance Sheet Today • Asset Portfolio -- Financial vs Tangible Real Assets • Liability Structure -- Mortgages vs Consumer Debt • Net Worth • Source: Federal Reserve’s Flow of Funds Accounts
Asset Allocation 35
$34.3T
30 25
$19.8T
Trillions of 20 Dollars 15 10 5 0
FINANCIAL ASSETS
TANGIBLE REAL ASSETS
Total Assets (2003Q4) = $54.2T
Financial Asset Allocation Money Market $8.3T (24.1%)
$5.3T (15.3%) $2.5T (7.3%)
$5.7T (16.6%) $9.3T (27.1%)
Instruments Credit Market Instruments Corporate Equities Stock & Bond Mutual Funds Pension Funds Other
$3.3T (9.6%)
Direct Holdings of Corporate Equities as Percent of Financial Assets = 16.6% Direct & Indirect Holdings of Corporate Equities as Percent of Financial Assets = 31.1%
Tangible Real Assets $1.5T (7.5%) $3.2T (15.9%)
Housing Consumer Durables Other
$15.2T (76.6%)
Housing as Percent of Tangible Real Assets = 76.6%
Structure of Liabilites 7
$6.8T
6 5 Trillions of 4 Dollars 3 $2.0T
2
$0.9T
1 0
Home Mortgages
Consumer Credit
Other
Total Liabilities (2003Q4) = $9.8T
Contributions of Equities & Housing to Household Net Worth $T
% Net Worth
5.7
12.9
Equities (direct & indirect)
10.7
24.0
Housing (assets)
15.2
34.2
Equities (direct)
Home Mortgages (liabilities)
6.8
Net Equity in Housing
8.4
Net Worth
$44.4 T
18.8
20
19
19
19
19
19
19
19
19
19
19
02
97
92
87
82
77
72
67
62
57
52
Q 1
Q 1
Q 1
Q 1
Q 1
Q 1
Q 1
Q 1
Q 1
Q 1
Q 1
Percent
Financial Assets as a Percent of Total Assets 75
70
65
60
55
Features of Equities’ Share of Households’ Asset Portfolios • Relative stability over the longer term • Nature of short-run shifts in equities’ share of household assets in response to economic and financial conditions • Passive vs active reallocations • Trends in equity ownership
19 52 Q 19 1 55 Q 19 1 58 Q 19 1 61 Q 19 1 64 Q 19 1 67 Q 19 1 70 Q 19 1 73 Q 19 1 76 Q 19 1 79 Q 19 1 82 Q 19 1 85 Q 19 1 88 Q 19 1 91 Q 19 1 94 Q 19 1 97 Q 20 1 00 Q 20 1 03 Q 1
Percent
Direct & Indirect Holdings of Equities as Percent of Net Worth 40
35
30
25
20
15
10
5
0
Indirect Holdings of Corporate Equities as Percent of Total 50 40
Indirect Holdings
20 10
Pension Funds
0 19 52 Q 1 19 57 Q 1 19 62 Q 1 19 67 Q 1 19 72 Q 1 19 77 Q 1 19 82 Q 1 19 87 Q 1 19 92 Q 1 19 97 Q 1 20 02 Q 1
Percent
30
Features of Home Equity’s Contribution to Household Wealth • Relative stability over the longer-term • Home Equity Lending • Refinancing
Home Equity as a Percent of Households’ Net Worth 24
Percent
20
16
12
1952Q1: 19.0% 2003Q4: 18.6% AVE: 18.6%
1952Q1 1957Q1 1962Q1 1967Q1 1972Q1 1977Q1 1982Q1 1987Q1 1992Q1 1997Q1 2002Q1
Homeowners’ Equity as Percent of Real Estate Value 85 80
Percent
75 70 65 60 55 50
1952Q1 1957Q1 1962Q1 1967Q1 1972Q1 1977Q1 1982Q1 1987Q1 1992Q1 1997Q1 2002Q1
Mortgage Refinancing and Interest Rates 12,000
Refi Index
Mortgage Rate (30-yr fixed)
10,000 8,000
10 9 8 7 6
6,000 4,000 2,000
01 /0 7/ 00 05 /2 6/ 00 10 /1 3/ 00 03 /0 2/ 01 07 /2 0/ 01 12 /0 7/ 01 04 /2 6/ 02 09 /1 3/ 02 01 /3 1/ 03 06 /2 0/ 03 11 /0 7/ 03
0
5 4 3 2 1 0
Mortgage Refinancing and House Price Appreciation 140
Refi Index
Real House Price Index
10,000 9,000
130
8,000 7,000
120
6,000
House Price
110
5,000 4,000
100
3,000 2,000
Refi Index
90
1,000 80 3/31/1990
0 9/30/1992
3/31/1995
9/30/1997
3/31/2000
Source: MBAA and OFHEO
9/30/2002
Conclusions • Long-run Stability in Household Balance Sheets -- Financial Assets = 2/3 of Total Assets -- Home Equity = 19% of Net Worth • Equities as Share of Financial Assets may Continue to Grow • Current Balance Sheet near Long-run Ave • Housing & Equity Markets in Balance