Answering Market Questions in S&T/Investment Banking Interviews 2019

We get asked a lot by people who are interviewing for sales and trading (and investment banking, as MDs like to see if students know what is going on in the markets, can speak to the underlying factors and develop a view). We are reluctant to offer commentary here because it becomes stale quickly. In fact it is already stale, but we are going to try to touch on a few long-term trends that hopefully have some staying power. Also we will give you what you need to know for an interview.

The only way to actually “master” these questions, as the right answer changes practically every week, is to consume the news every day and to be able to think independently. While the answer to “walk me through a DCF” will never change, “what is going on with the S&P 500” or “where do you see the oil price in 6 months” will. Trying to catch up on the Wall Street Journal or Financial Times the day before the interview will never show as well as someone who is a news junkie.

Interviewees need to address past present and future – usually starting with present. This is easily done by grabbing the latest prices on a feed such as Bloomberg right before the interview.

The next question is how did the index get to this value over the last 6/12/18 month time horizon. This is also relatively easy because you only have to regurgitate the news.

The hardest questions is developing a view as to how prices will move in the future. They do not have to be right or align with the interviewer – it only has to be compelling, well constructed and not sensationalist (i.e. don’t predict a nuclear doomsday event from the trade war). It does not have to be right, because if you were sure to be right you would not be interviewing for a rotational S&T seat at Citi.

For S&T, an interviewee is expected to know most major data releases and how they affect stocks, rates and commodities. We have a list of data releases in our S&T section.

We will mostly discuss stocks and commodities here, but know that rates flows through to investment grade fixed income (on the trading floor they are looked at similarly) and foreign exchange. Foreign exchange is dictated by perceived interest rate moves and current account balances – everything is intertwined. Credit is different, but specialized. The tougher the credit the more idiosyncratic the risk.

How Did Stocks Perform in 2019

2018 started extremely bullish with overall optimism about the Trump presidency and the effects of perceived stimulus. These included purported infrastructure grants and expenditures and corporate spending owing to a lowered corporate tax rate.

Infrastructure spending has not panned out despite the US’s decaying existing infrastructure and the fact that a large population is underserved by everything from mass transit to decaying roads.

Lower corporate taxes have spurred return of capital initiatives such as dividend hikes but primarily share repurchases in the US instead of large scale hiring (although the employment situation has improved) that was envisioned. Much of the corporate spending has gone into building factories in the US, and corporates are putting out public relations memos about spending in certain states (for additional grants and tax benefits), but these are low employment, high tech manufacturing businesses that require few humans and specialized skills to operate the machinery.

Fundamentally, the government continues to address the root of the problem, which is a large unskilled labor force. Education and health care reform are not on the cards. The government shutdown continues (although likely to end soon) but is expected to shave points off of GDP and is money that is not recycled through the economy via consumer spending.

Although there is a lot of noise still around immigration and the US Mexico Border Wall, policies that could be stimulative include the Trump Administration’s pro-energy slant, with noise around having Federal powers override state jurisdiction for building energy infrastructure (notably Keystone XL).

China Trade War Fears and Declining Consumer Confidence

The S&P is around 2660, which is a far cry from almost 3000 at the beginning of 2018. Despite higher corporate earnings and an expanding US economy, a number of concerns are causing market participants to be pessimistic. These are 1) rising rates (partly due to monetary policy) – all things equal, this raises the cost of equity for stocks and the cost of capital for firms overall; 2) fear around a Chinese slowdown as China is the leading driver for global GDP growth and a large profit center for American corporates.

The China situation is even more concerning owing to the accelerated rhetoric and widely marketed “trade war” – which focuses on the US current account deficit with China. At the most intense stage prior to US midterm elections, the stock market plummeted.

The largely publicized conflict was helpful in retaining seats by playing to the Republican Party’s core voter base and now the Trump Administration has turned around to the “deal making” stage. Chinese concessions are largely what were on offer prior to midterm elections, but this is not given attention. Nonetheless, the showmanship has reached new levels in foreign policy, with arrests of Chinese executives and then offering to throw in a good word if the right deal is struck – effectively politicizing the legal system.

There are too many vested interests in the US to have real geopolitical conflict. An enormous amount of US corporate wealth is tied up in China and that will dissapate should there be an escalation that cannot be reversed.

Additionally, the trade deficit is grossly overstated in terms of true economics as it is measured on where the “Made In China” label is stamped as opposed to identifying which countries capture the economics along the value chain of making a computer or an iPhone.

The US, with its knowledge economy and large patent universe, captures a large chunk of plenty of Made in China materials. The executives in the US recognize this and are the largest donors to the Republican Party, which makes any real conflict self defeating.

Read Part II Here