4 Economic Indicators That Move Financial Stocks

The financial services sector is integral to the overall level of global economic activity. For this reason, most of the major macroeconomic indicators are very important pieces of data for the outlook of the sector. Financial services companies rely on high levels of business activity to generate revenue by acting as an intermediary in economic transactions.

Economic indicators are released through studies, surveys, sector reports and the data-gathering efforts of government agencies. These indicators have wide-reaching implications for all market sectors. The financial services sector, however, is perhaps the most sensitive to large economic aggregates.

Investors in financial services will typically watch for these four economic indicators as a sign of overall health or potential trouble.

1. Interest Rates

Interest rates are the most significant indicators for banks and other lenders. Banks profit from the difference between the rates they pay depositors and the rates that they charge to borrowers. Banks find it increasingly difficult to pass on interest rate costs to consumers as rates rise. High borrowing costs correspond with fewer loans and more saving. This limits the volume of total profitable activity for lenders.

It is very clear that banks perform best – at least in the short term – when interest rates are lower.

Lower interest rates also turn savers into speculators. It’s more difficult to beat inflation when the rate on a savings account or certificate of deposit (CD) is paying a low rate. Workers will turn more often to equities to try to find ways to counter inflation and grow their nest eggs for retirement. This creates demand for asset management services, brokers and other money intermediaries.

2. Gross Domestic Product

Countries around the world track levels of economic activity through gross domestic product (GDP) calculations. Increases in the level of spending or investments cause GDP to rise, and the financial service sector typically sees increased demand for its goods and services when spending and investment levels go up.

Since GDP is the most common and broadest measure of a region’s economy, and it is often considered a lagging indicator, the relationship between any one company’s stock and the GDP is tenuous at best. Nevertheless, it is considered a useful benchmark for the overall health of the financial sector.

3. Government Regulation and Fiscal Policy

Government regulation is not necessarily an indicator in the traditional sense; instead, investors should keep an eye toward how regulations and tariffs might impact activity from the financial services sector. Banks, which comprise more than half of the entire sector in the U.S., are heavily influenced by reserve requirements, usury laws, insurance and lending guidelines, as well as the possibility of government assistance.

Fiscal policy doesn’t affect banks as directly. Rather, it affects the banks’ possible customers and trading partners. Consumer confidence tends to rise during expansionary fiscal policy and fall during contractionary fiscal policy. This could translate into fewer investments, trades and loans.

4. Existing Home Sales

The Existing-Home Sales report is issued monthly by the National Association of Realtors. It provides banks and mortgage lenders with recent data on sales prices, inventory levels and the total number of homes sold.

This report often impacts prevailing mortgage rates. Investors in financial services and home construction should see upticks when home sales data is rising.

The Top 3 Twitter Shareholders (TWTR)

Twitter, Inc. (NYSE: TWTR) operates the popular Twitter.com messaging platform, as well as mobile app Periscope, which allows users to broadcast live videos. Originally, Noah Glass created a service called Odeo, providing users a way to call a phone number that would convert messages into MP3 broadcasts on the internet, an early pioneer of podcasting. When Apple released iTunes podcasting, the investments in Odeo turned sour. Odeo chief executive officer (CEO) Evan Clark Williams bought back all the shares from investors for a speculated amount of $5 million and formed Twitter in 2006 with Biz Stone and Jack Dorsey.

By tweaking the Odeo platform, they created Twitter, which allowed users to text a message to a phone number that would be broadcast to all their friends simultaneously. Eventually, the name was changed, and the company was spun out in 2007 as Twitter, a messaging platform through which users could broadcast 140-character messages known as tweets to users globally. The site has grown from less than 5,000 users in 2006 to 335 million monthly active users, according to the company’s Q2 2018 report.

The following are the top three owners of Twitter shares.

Evan Clark Williams

Evan Clark Williams is the largest owner of Twitter, with 1.7 million shares owned directly as of on July 24, 2018. He also indirectly holds 276,161 million shares. Williams joined Alphabet Inc. (NASDAQ: GOOGL) after his company Blogger.com was purchased for an undisclosed sum in 2003. Some have speculated the amount may have been as high as $20 million. Williams left Google shortly after, in 2004. His early investment in Odeo positioned him as CEO. There is much controversy regarding his purchase of Odeo when early investors wanted out. Williams wrote a letter to shareholders expressing his regret and his conclusion that the future of Odeo was bleak. He offered to repurchase all the shares back from investors. Employee users of the early Twitter product were absolutely addicted to the messaging platform, racking up $400 monthly SMS bills. Questions lurk whether Williams knowingly overstated Odeo’s demise to swoop up all the assets in order to form Twitter. Williams is a board member of Twitter and the CEO of Medium and Obvious Corp.

Jack Dorsey

Jack Dorsey is the second-largest owner of Twitter shares, indirectly holding 18 million shares as of May 2018. Dorsey was part of the Odeo design team and arguably the brainchild behind the original Twitter platform. Dorsey built a simple site that allowed users to broadcast short text messages to all their friends. Dorsey became the CEO of Twitter in March 2006 but was replaced by co-founder Evan Williams in October 2008, when Dorsey became chairman of the board. Dorsey co-founded credit card and electronic payment processor Square Inc. (NYSE: SQ) in 2009. He returned as CEO of Twitter in October 2015 while also maintaining his CEO role at Square Inc.

Dorsey helped negotiate a deal with the National Football League (NFL) to stream 10 Thursday-night football games during the 2016 season for a fee of $10 million. Twitter will live-stream the games, and other sites will be able to embed the live Twitter feed, thereby attracting more traffic. The deal is considered a success due to the relatively cheap fee of $1 million per game, compared to $45 million per Thursday-night game that NBC is paying during the 2016 and 2017 season.

Peter H. Fenton

Peter Fenton is a general partner of Benchmark Capital and was a director on the board at Twitter. As an insider, he directly owns 21,165 shares and indirectly owns 3,714,149 shares. The reality is that he is one of six partners at Benchmark Capital, which acquired a 6.6% stake in Twitter during a Series C funding round in 2009, at a $25 billion valuation. Fenton is also an investor in Zendesk (NYSE: ZEN), Yelp Inc. (NASDAQ: YELP) and Hortonworks Inc. (NYSE: HDP). He did not seek re-election to the board after his term expired in 2016.