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Have you ever read a newspaper headline from a finance column and been mystified by what you’ve just read? Every subject seems to have its own vocabulary, and sometimes the “experts” forget that we don’t all speak the language! Finance is certainly no exception. In this post, we translate financial headline gibberish into something easier to understand, so that hopefully next time you read a headline you’ll have a better idea of what it means.
We’ve all done it: skimmed the headlines to figure out what’s going on in the world without diving into the meat of the article. After all, headlines are attention-grabbing! However, one of the difficulties with “headlining” is that, while it leaves us with the idea that we learned what’s going on, because we haven’t given our brains time to absorb the information, we actually haven’t gained a true understanding.1
This is especially true when confronted with new “vocabulary” or a subject that we’re less familiar with. In the past, clients have commented that reading articles about investing or listening to market experts makes them feel like they need to learn a foreign language to understand finance. While jargon is sometimes necessary, often it can be used to obfuscate the information and make it needlessly confusing to the end reader. In this article, we break down a recent headline to give you a better understanding of some financial terms so that next time you’re reading (or skimming) the “markets” section of your favorite news site, it’ll be a little easier to understand.
Stocks Rally to New Record Highs on Jobs Day
Reading this you may have gotten the sense (correctly) that this was a positive headline. After all, anything reaching a “high” is generally a good thing, right? But what exactly is a “stock” and why is it that they’re at a high? First, we’ll dive into what a stock is and what makes it different from a bond.
So what does it mean when stocks are at a “high”? First, we have to understand what a stock market index is. A stock market index measures a subset of the stock market and helps investors evaluate the market’s performance. Common indices that you have probably heard of include the Dow Jones Industrial Average (DJIA) and the S&P 500. While the stock market is often referred to as synonymous with the DJIA and the S&P 500, in fact the entire stock market encompasses many more companies than either of those indices represents.
The entire public US stock market is around 6000 companies2, yet the DJIA is just a basket of 30 companies while the S&P 500 consists of only 500 companies. While either index can be a good representation of what’s going on in the stock market as a whole, it’s important to note that the breath of the US stock market is much larger than either index. As the companies that are in the index become more valuable (the price that an investor is willing to pay for a share of stock in the company increases), the index gets “higher.” For investors, a stock market index “high” indicates that its overall value is up and, therefore, the value of their investment(s) is also likely to be reaching a high.
A stock market index can go up or down for any number of reasons. Sometimes it goes up (or down) because one company has an extremely good (or bad) day and it sways the rest of the index. Sometimes a non-financial market event can cause the entire stock market to go up or down. For instance, uncertainty about the COVID-19 pandemic caused a swift market downturn in February and March 2020. The headline above links “jobs day” to why the stock market went up. On the economic calendar there are multiple days a quarter that investors watch to try to glean how the economy is doing. This headline refers to December 2020’s “jobs day,” which is the date when the Bureau of Labor Statistics reports how many jobs were added (or lost) in the US during the previous month. Somewhat counterintuitively, the job report indicated that fewer than expected jobs were added in November, and the article argues that the stock market increased because the jobs report would put more pressure on Congress to approve more financial stimulus (which the stock market has been benefiting from recently).
So, if we were skimming the newspaper and came across this headline, what would it tell us? The Treehouse Wealth Advisors Translation: on the day that the Bureau of Labor Statistics reported how many jobs were added or lost in the US the previous month, the price that investors were willing to pay for ownership in a company went up across a large majority of companies in the United States, making the companies more valuable.
If you’ve come across a headline with a word or phrase that is gibberish to you, send it to us and we’ll take a stab at it in one of our next blog posts!
Garrison Point Advisors, LLC doing business as “Treehouse Wealth Advisors” (“TWA”) is an investment advisor in Walnut Creek, CA registered with the Securities and Exchange Commission (“SEC”). Registration of an investment advisor does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. TWA only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of TWA’s current written disclosure brochures, Form ADV Part 1 and Part 2A, filed with the SEC which discusses among other things, TWA’s business practices, services, and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov.
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