As an investor, you’ve likely heard it referenced hundreds (if not thousands) of times – but what’s so special about Wall Street? In short, Wall Street is the Western world’s fiscal epicentre, but there’s quite a lot more to its widespread clout. Here’s what else you should know about this famous financial hub.
What is Wall Street?
In literal terms, Wall Street is an actual street situated at the bottom end of Manhattan’s Financial District. Spanning around eight blocks, the strip contains stock exchanges, banks, major finance firms, hedge funds, insurance companies and more. The likes of JP Morgan Chase, Goldman Sachs, Morgan Stanley, Citibank, American Express and other heavyweights sit on or near Wall Street. Stock exchanges like the New York Stock Exchange (NYSE) and NASDAQ are on Wall Street too.
But the name also has a more figurative meaning. Wall Street has come to refer to the entire financial sector, including firms that aren’t even situated there. Many use it as a symbol of sorts for a company, stock exchange, investment banker, or any other related business based in the US. It also encapsulates the capitalist ethos they reflect.
Experts aren’t entirely certain where the name ‘Wall Street’ comes from: it could have been named after a literal wall; or taken from the Walloons, the area’s Dutch settlers. But as for its origins as a financial centre, Wall Street was first an outdoor marketplace. It then evolved into an auction site for slaves between the 1700s and 1800s. Over time, the US's central finance operations shifted from Philadelphia to New York, and Wall Street became the national (and, eventually, international) hub of money and investing.
Wall Street’s international influence
Wall Street might only occupy a small portion of Manhattan, but its reach is far wider. After all, the US is the biggest economy in the world, and NYC is its financial centre. Wall Street is also home to numerous multinational firms and two of the largest stock exchanges, both of which list some of the most notable names in business.
Because of its magnitude, Wall Street is hugely influential on other markets and wider investing trends. In fact, Wall Street is often considered a bellwether for the global economy: if something happens there, it can have a massive ripple effect on markets and investors worldwide.
The Global Financial Crisis is just one example. Nearly two decades ago, several Wall Street and other US financial firms went under due to subprime mortgage lending and the housing bubble collapse. This led to an economic downturn and instability around the world.
Another example is the dot-com boom of the late 90s and early 00s. Throughout this period, there was significant investment in technological developments. While many companies didn’t survive the eventual dot-com crash, several did. This gave rise to some of today’s chief tech giants: Google, Amazon, eBay and Yahoo! among others.
What happens on Wall Street can also have a huge impact on investor sentiment and market trends around the world. If things are shaping up well for the Wall Street market, it can foster a widespread sense of optimism and a consequent uptick in investment. On the other hand, if things aren’t looking good, global investors might go for safer investments.
Its power over Australia
What about in Australia specifically? The Australian Securities Exchange ( ASX) often follows Wall Street’s lead, with trading trends and market movements typically correlating with the performance of the NYSE and NASDAQ.
There are a few reasons for this. As we know, one is investor sentiment. When there’s a notable upswing or downturn in the US, Australian investors have historically tended to react accordingly, affecting the performance of the ASX.
Another factor is that the US and Australia are very closely intertwined, especially where economics is concerned. The two are critical trading partners, largely thanks to the Australia-United States Free Trade Agreement. The US imports things like minerals, agricultural products and energy from Australia, and changes in demand for these can directly impact Aussie businesses and the local securities industry.
The US also contributes a lot of foreign investment into Australia to support different sectors . Plus, there are US investors who put their money into the Australian share market, which makes the ASX more affected by the investing climate in the US.
It’s not a given that the ASX will mirror the movements of US stock exchanges. Local events can also alter the Aussie stock market – like politics and interest rate fluctuations, for example. And sometimes there are US ones that have little sway over the ASX.
Wall Street indexes
You might be familiar with the Dow Jones Industrial Average (DJIA) and S&P 500 . The former is a stock market index that tracks 30 major American companies, while the latter tracks the top 500 publicly traded companies in the US.
But what do they have to do with Wall Street? Both indexes are incredibly useful barometers that reflect the overall health of Wall Street, as well as the wider US economy. Changes in either can indicate broader economic trends, often having a flow-on effect on investor activity.
For example, if the DJIA goes up, it may imply that Wall Street is doing well and investors are feeling confident. If it goes down, it could indicate economic challenges and a more pessimistic sentiment.
If you invest in US shares , both indexes can be handy for evaluating your investments. But even if you only invest locally, they can still be valuable tools. Because of Wall Street’s massive influence, they can give you insight into how shifts in the US economy might impact global markets, including Australia’s.
Innovations from Wall Street
Wall Street is also respected because it gave rise to a number of investing innovations – like exchange-traded funds (ETFs) .
ETFs might seem completely commonplace now, but before the early 1990s, no-one had ever heard of them (let alone invested in them).
The first ETF was technically launched in Canada, but the one that created the framework for future ETFs and led to their massive growth was introduced on Wall Street in 1993. That year, State Street Global Advisors launched the SPDR S&P 500 ETF Trust (SPY) , an ETF that contained a mere $6.5 million in assets.
ETFs weren’t a big deal back then, but all of that has changed. Now, the global ETF market is worth trillions of dollars and that very first US ETF is the largest in the world. (As of earlier this year, SPY has over $500 billion in assets under management.)
How Wall Street is regulated
Like most things in the finance world, Wall Street is heavily regulated. This aims to ensure the market stays honest and that investors are protected.
There are a few regulators involved, but the main body overseeing Wall Street is the Securities and Exchange Commission (SEC). The SEC sets laws for securities to make the market fair, stable and transparent for investors.
A major reason why regulation is so crucial is that it keeps financial firms accountable. It ensures they’re open with key information and that they abide by certain practices that don't take advantage of consumers.
The GFC is a good example of the importance of regulation. It was largely caused by poorly regulated and irresponsible lending, which exploited those who took out loans. In 2010, the Dodd-Frank Act – the biggest-ever Wall Street reform in history – was put in place to prevent this kind of catastrophe from happening again.
The future of Wall Street
So, what’s next for the world’s most famous financial hub?
Like most things, Wall Street is facing significant disruption through the advent of tech – namely AI. There are new inventions like robo-advisers, which provide wealth management services driven by algorithms. Then there are high-frequency trading algorithms. These seek to gauge when stocks are over or undervalued and buy or sell them to capitalise on their incorrect valuation.
There was also the fairly recent controversy where numerous Wall Street stalwarts like JPMorgan Chase, Citigroup and Bank of America banned the use of ChatGPT and other AI tools. Their concerns were over privacy, factual inaccuracies (possibly leading to poor trading decisions), and the lack of human oversight when making those decisions.
With the advent of AI and other technologies, it stands to reason that Wall Street will become increasingly complex, particularly where legislation is concerned. There’s also the issue of cybersecurity, which is a crucial concern as things become more digitised.
Another future challenge for Wall Street includes skyrocketing interest rates, which often lead to market volatility and overall uncertainty. There's also the potential for economic instability, which can affect market performance and decrease investor confidence.
Lastly, Wall Street is made up of several firms that have been around for eons and largely work on fairly traditional frameworks. In recent years, a number of disruptors (including Pearler!) have entered the field and changed the way people can invest, especially young investors. As such, Wall Street may face the challenge of trying to appeal to a more tech-savvy crowd.
What long-term investors can learn from Wall Street
With all of this in mind, what can you take away as a long-term investor? Well, quite a bit.
From an educational perspective, you can stay abreast of happenings on Wall Street to help inform your investing strategy . You could monitor emerging trends and industries, and indexes such as the DJIA and S&P500, to better grasp market sentiment.
Perhaps most importantly, though, Wall Street offers insight into how the market works and how long-term investors might choose to react.
By analysing Wall Street, you can better recognise just how cyclical the market is. It waxes, it wanes, it stagnates, and sometimes it’s wildly unpredictable.
As a long-term investor, this can foster a more future-focused perspective that weathers the ups and downs of share investing. You may realise the importance of holding during market downturns rather than selling as a knee-jerk reaction. You might also avoid trying to time the market (because we know that rarely works out).
Wall Street is obviously a great source of knowledge, but it’s not necessarily a lodestar to live, die and invest by. Continue doing your own research into markets and trends, and stay informed but not overwhelmed.
Happy investing!
