Financial Jargon, December 2023

“Jargon” - special words or expressions that are used by a particular profession or group and are difficult for others to understand.

Terms discussed in this video: stock market rally, the Fed, bond yields, “pricing in”, dollar weakening and strengthening. Click here to view the video. 

Introduction to this series.

The purpose of this blog series is to help new investors better understand terms commonly used in the financial news. Understanding industry jargon will help you have more useful conversations with friends, family, and colleagues. Mastering the underlying concepts can help build your reputation as an individual with strong potential to do well in the financial service industry.

If you run across any jargon that you would like me to cover in a future video, please reach out at MarciaLucas@Person-to-Person.net.

Term #1: Market Rally

A stock or bond market “rally” is a significant upward change in stock or bond prices. A rally can be as short as a few hours or as long as several years. The chart below shows the 3-month change in the S&P 500 stock index (blue line), the Dow Industrials stock index (pink line), and the AGG ETF (green line) a proxy for the Bloomberg Aggregate bond index, from mid-September 2023 to mid-December 2023.

Rallys can be driven by rumors or facts leading to increasing optimism about future profits of businesses, and also by expected or actual changes in the general level of interest rates. All three indexes in the chart rallied at the end of 2023 because Federal Reserve chairman Jerome Powell indicated the Fed had most likely won its battle against inflation and the next step in monetary policy would be to reduce short-term interest rates.

This leads us to our next term…

Term #2: The Fed

The “Fed” is most commonly used to refer to the Federal Open Market Committee (FOMC) which sets the level of short-term interest rates banks are charged to get capital to make loans. The FOMC also conducts “open market operations”, also known as quantitative tightening or quantitative easing, in an effort to influence the level of longer-term interest rates.

Every few months, the FOMC publishes its ‘dot plot’ where each member of the committee indicates the level they believe short-term interest rates should be in the future. This forecast has a significant impact on the price investors are willing to pay for stocks and bonds: lower interest rates usually lead to higher stock and bond prices.

Term #3: Bond Yields

The first thing to realize is that the financial news reports often use the word “yield” to refer to the expected return of 10-year U.S. Treasury bonds, and the term “interest rates” to refer to short-term rates controlled by the Fed. However, these terms can refer to a wide variety of rates charged to consumers or earned by investors on a variety of financial instruments.

This chart compares the level of interest rates (yields) of Treasury securities with maturity dates (repayment dates) between 1 month and 30 years. The chart shows that Treasury rates were low and “flat” in 2019, before the Covid-19 pandemic. (Dark green line, about the same level at short-term maturities and long-term maturities.) As the pandemic hit in 2020 and continued into 2021 (lighter green lines), rates fell even further as the Fed tried to help individuals and businesses survive the economic shutdown associated with the pandemic.

Once the pandemic leveled out in 2022, businesses couldn’t get enough supplies and employees fast enough to satisfy higher demand, causing inflation to “spike”. (A significant increase in the price of common goods and services used by U.S. consumers.) This caused the Fed to increase short-term interest rates in an attempt to depress the demand for money, slow down economic activity, and bring prices of goods and services down. (See blue lines at the top of the chart.)

Term #4: “Pricing In”

The price of stocks and bonds reflects investors’ best guess of future profitability based on a variety of macro- and microeconomic factors. This is sometimes called “pricing in" as investors use all the information available to decide how much they should pay for stocks and bonds today. But beware! Investors are notorious for becoming overly optimistic or overly pessimistic as they extrapolate current trends too far into the future. This changing optimism and pessimism can cause large swings in stock and bond prices as more information becomes available, as evidenced by the huge market rally at the end of 2023.

Term #5: Dollar Strengthening and Weakening

Economic news and investor expectations can move not only stock and bond prices, but also the exchange rate between the U.S. dollar and other major currencies. This rate will influence the flow of trade between countries, which can impact economic strength and future profitability, which can then impact stock and bond prices. Financial professionals have to navigate a continuing cycle of news, expectations, market prices, more news, changing expectations, adjusted market prices, etc.

Summary

Every industry has its own language, so don’t feel bad if you don’t understand much of the financial news at first! The more you read, the more questions you ask, and the more research you do, the more you will understand.

No matter what industry you work in, understanding the jargon can go a long way to build your reputation as someone who works hard and can do well in their future career. It’s difficult at first, but definitely worth it!

December 28, 2023 Marcia Lucas, Person-to-Person.net