Dark Blue: S&P 500 Green: Bank of American Corp (BAC) • B of A dropped more than 80% from early 2008 to early 2009…up 20% since • Individual stocks much more volatile than aggregate of S and PS & P 500 2008-11 •S&P: 500 stocks •The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock market exchanges; the New York Stock Exchange and the NASDAQ.5000 1000 Dot Com Bubble The technology-heavy NASDAQ Composite index peaked at 5,048 in March 2000, reflecting the high point of the dot-com bubble. 1996=1000; jumped 5 times in 4 years. Why? Collapsed to just above 1000 by late 2002. Why?• Stock Market Crash of 1987 • This crash occurred on October 19, 1987, now called the Black Monday. On this day, the Dow Jones Industrial Average slipped more than 500 points, or 22% of its value. Other indices were also affected badly - the S&P500 lost 20% and the NASDAQ Composite fell 11%. Why NASDAQ didn't fall as much as the other two was probably because the underlying market making system failed and the system was totally deadlocked. So far, the 1987 stock market crash is the largest one-day decline in history.• Stock Market Crash of 1929 • October 24, 1929, known as the Black Thursday, marked the start of the crash of 1929. This was followed by Black Monday and Tuesday, the very next week. The Dow Jones Industrial Average fell more than 20% just on Monday and Tuesday alone. By mid-November, the index had dropped by around 40% compared to its peak just a couple of months ago. The index lost almost 90% of its value, before it began a gradual uptrend in mid 1932.Nikkei 225(1970-) And let’s not forget Japan…reached 40,000 on December 31,1989…and still is just above 10,000…Copyright © 2009 , 2012 by Worth Publishers Money, Banking, and Financial Markets Second Edition U.S. Real Interest Rates, 1960-2010 This graph charts the behavior over time of four interest rates in the United States. Each is a real rate-the nominal rate minus inflation over the previous year. The broad movements in the four interest rates are similar over time. Source: Federal Reserve Bank of St. Louis 12 10 8 6 4 2 0 -2 -4 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year Real interest rate, % 10-year Treasury bonds BBB corporate bonds 30-year mortgages 90-day Treasury billsCopyright © 2009 , 2012 by Worth Publishers Money, Banking, and Financial Markets Second Edition International Real Interest Rates, 1960-2009 Real interest rates in the three countries examined here follow the same broad pattern over time. (The real interest rate for each country is the nominal rate on 3-month government bonds minus inflation over the previous year.) Source: International Monetary Fund 10 8 6 4 2 -2 -6 -8 -10 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year Real interest rate, % 0 -4 Canada USA FranceCopyright © 2009 , 2012 by Worth Publishers Money, Banking, and Financial Markets Second Edition Inflation and Nominal Interest Rates Across Countries For the 1990s, this graph plots average inflation and the average nominal interest rate on 3-month government bonds in 41 countries. The graph illustrates the Fisher effect: higher inflation raises the nominal interest rate. Source: International Monetary Fund 20 10 0 10 Inflation rate, % Nominal interest rate, % 20 30 40 50 60 70 80 90 100 30 40 50 60 70 80 Turkey Russia Romania Mexico Poland South Africa USA JapanCopyright © 2009 , 2012 by Worth Publishers Money, Banking, and Financial Markets Second