Rosetta Stone

In: Business and Management

Submitted By frodo031
Words 514
Pages 3
Economic Conditions
The previous year had been a dramatic one for the world economy. Prices on global credit and equity markets had been in free fall. The U.S. equity market was down over 50% from its peak in October 2007 (see Exhibit 3 for details of the recent price history of U.S. equity market returns in total and for select industries). The collapse of world financial markets had preceded deterioration in economic activity worldwide, including dramatic shifts in real estate values, unemployment levels, and discretionary consumer spending. The severity of economic conditions had prompted massive intervention by world governments with dramatic policy changes, particularly by the U.S. federal government. The economic and political conditions were frequently compared with those of the Great Depression of the 1930s. With the crisis in full swing, investors had flocked to U.S. Treasuries for security, pushing down yields on these instruments to historic lows (see Exhibit 4). Heightened investor risk aversion had expanded the risk premium for all securities. The general market risk premium was currently estimated at 6.5% or 8.5%, respectively, depending on whether long-term or short-term government yields were used in estimating the risk-free rate.
In February and March of 2009, there had been some evidence of improvement in financial and economic conditions. Wholesale inventories were in decline. Newhome sales were beginning to rise. The equity market had experienced a rally of over
20% in recent weeks. Yet many money managers and analysts worried that such economic green shoots were only a temporary rally in a longer-running bear market.
There was strong concern that the magnitude of government spending would spur inflation in the U.S. dollar. GDP growth was still negative, corporate bankruptcy rates and unemployment were at historic highs, and…...

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