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What Are All Those Financial Terms: An Explanation of Financial Jargon in the News Today

The current major events that have rocked the world socially and economically in recent weeks have many investors scrambling to better understand a new financial language in the press today. At Innova Wealth Partners, we look to educate our clients so they are prepared for upcoming action by the Federal Reserve and government and empowered to control their financial futures!

 

We’ll cover several key terms related to the Federal Reserve, fiscal (government) interaction, the current financial markets, and finally recovery!

 

The Federal Reserve (“Fed”) is the central bank of the United States. One main duty of the Fed is to provide stability to the banking and monetary system that you use for everyday life. The Fed has taken action to try and maintain that stability. In addition to cuts in interest rates, here are a few key changes:

Discount Window – This is how the Fed provides short-term loans and liquidity to the major banks in the United States which in turn is pushed out to households and businesses. On Sunday, March 15th, the Fed lowered the rate for banks to borrow through the discount window essentially to maintain stability in our nation’s banks. Many relate this to using WD-40 to fix a squeaky door hinge.

 

Commercial Paper Funding Facility (“CPFF”) – This facility was created at the height of the financial crisis in October 2008. The CPFF allows the Fed to purchase asset-backed loans, which is a loan that is guaranteed by a financial asset. A few examples are residential mortgages (supported by the value of your home) and commercial loans (supported by the value of the office building in the center of town). This helps supply liquidity (and lower rates) for auto loans, residential mortgages, commercial mortgages, and loans to meet the operational needs of a range of companies.

 

As our government works tirelessly (both Republicans and Democrats) to find solutions during this unprecedented crisis, many ideas are being hashed out to provide support to households and small businesses. These ideas cover anything and everything from eliminating payroll tax, forgiving interest on student loans, paying for medical supplies, and even CASH. While an explanation of all the key terms in this section could be an entire book, we try to provide a few highlights:

Fiscal Stimulus – This refers to increasing government consumption and support for the economy when households and businesses pull back their spending. The main intention here is to minimize the ebbs and flows to stimulate and reinvigorate the economy. Most fiscal stimulus includes lowering taxes and increasing government spending to put additional dollars in the hands of US consumers and businesses.

 

Means Test – This is an examination into the financial state of a person or household when being considered eligible for government support. The idea behind this is to limit government support to the households that truly need it. Currently, many government officials have floated ideas of providing $1,000 to $2,000 checks for households. Most of those proposals include limiting payment to only households under specific income thresholds. This is a primary example of means testing.

 

Tax Holiday Yet another form of stimulus to try and support US consumers and businesses; this is a government program to delay, reduce, or eliminate taxes owed to the US government. As a result, keeping more money in the pockets of households and businesses. Recently, a delay in income tax payment until July 15 from April 15 is one example. Other suggestions have been reducing or eliminating payroll taxes and/or eliminating sales tax.

 

The last few weeks have been a time to truly understand what risk looks like and no market has come away unscathed. Even assets normally considered safe during periods of stress, like US Treasury Bonds, Municipal Bonds, and Gold have seen severe price disruptions. When you turn on any financial network you consistently see words like plummet, crash, and plunge. Other than scary adjectives, what are some key financial terms that are most important to understand?

Circuit Breaker – Following the Black Monday stock market crash of October 1987, regulators instituted trading halts on the S&P 500 to curb panic selling. There are 3 key levels to consider. 1) If the S&P 500 drops 7% from the previous day’s market close all trading is stopped for 15 minutes. 2) If the S&P 500 then drops 13% from the previous trading day’s market close all trading is stopped a second time, again for 15 minutes, and 3) finally, if the S&P 500 drops 20% from the prior day’s market close trading is halted for the remainder of the day. All of these circuit breakers are related to the S&P 500 but please note that there are separate circuit breakers for individual securities and other markets with slightly different rules.

 

Black Swan – There are events that are unpredictable but with minimal consequences. There are events that are predictable with severe consequences. Then there are events that are extremely rare, are likely unpredictable by the majority, and have extremely severe consequences. These last events are ‘black swans’. The term originates from western historical belief that all swans were white. Then in 1697 a Dutch explorer discovered black swans in Australia. While this finding didn’t have severe consequences, prior to this finding it was perceived impossible that a swan existed that was not white.

 

VIX – Created in 1993, the volatility index or VIX represents how much the S&P 500 is expected to move over the next 30 days. Because the VIX tends to rise when the S&P 500 drops it is sometimes referred to as the ‘Fear Index’. Calculation of the VIX itself is a little beyond this letter, but it’s good for investors to know that a VIX above 30 generally corresponds with uncertainty, risk, and fear. While a VIX below 20 generally relates to calm, stable markets.

 

Like recent weeks, most of this newsletter so far is related to market stress and investor concern. But in most markets, this can often suggest a point of maximum financial opportunity! Looking forward, let’s consider a few terms to leave you on a positive note and seeing the silver lining.

V-Shaped Recovery (and U-Shaped Recovery) – These descriptions both relate to the identity of the letter that describes them. A V-Shaped Recovery is defined by a sharp but brief period of decline with a clearly defined bottom and lastly ending with a strong recovery representing the shape of a ‘V’. The U-Shaped Recovery tends to be less defined than the V shape with a less clearly defined trough at the bottom. After bumping along the bottom for a while the economy and/or markets climb back to recovery.

 

Generational Buying Opportunity! – This is the moment when prices have dropped so dramatically that current prices will likely never be seen again ‘in this generation’. These opportunities are usually the result of major economic catastrophes when prices have become extremely undervalued. Most generational buying opportunities are not widespread but relate to a specific price dislocation. An example is buying Apple stock following the tech crash in 2002 (for less than $2/sh).

 

 

And with that, we’ll do our best to leave you on a high note!

 

Ian Foster, one of Innova Wealth Partners principals, has some key employees helping as he works from home. They are hoping to brighten everyone’s spirits during this emotional event.

 

 

There will be bright times ahead. For those of you home right now, we look to provide another bright note. Morning Smile newsletter will provide you with good news daily. Enjoy!

 

As always, whether working from home or in the office the Innova Wealth Partners team is here for you. Please do not hesitate to call or email.

 

Innova Wealth Partners, LLC (“Innova”) is a registered investment advisor. Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. 

 

Readers of the information contained on these performance reports, should be aware that any action taken by the viewer/reader based on this information is taken at their own risk. This information does not address individual situations and should not be construed or viewed as any typed of individual or group recommendation. Be sure to first consult with a qualified financial adviser, tax professional, and/or legal counsel before implementing any securities, investments, or investment strategies discussed.

  

Any tax information and estate planning information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Innova does not provide legal or tax advice. Innova cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Innova makes no warranties with regard to such information or results obtained by its use. Innova disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.

 

Innova has been nominated for and has won several awards. Innova did not make any solicitation payments to any of the award sponsors in order to be nominated or to qualify for nomination of the award.

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