By Dena Frenkel
The Daily Record Newswire
Just when you thought you’d mastered the lingo, here comes another wave of financial jargon to describe what’s going on in the markets today. To help keep you up to speed, here’s a short glossary of some of the terms you might encounter.
Double dip: In economic parlance, this refers to the risk that the economy, not long after coming out of a recession, will slip back into another recession. In the current economic environment, some are raising the possibility that this could happen in the U.S. or elsewhere.
U-, V- or W-shaped recovery: This concerns the pace of an economic recovery. A “V-shaped” recovery means the economy dips drastically (the downslope of the “V”) and rebounds just as quickly (the upslope of the “V”). A “U-shaped” recession and recovery is less pronounced and slower to develop. A “W-shaped” recovery involves a sharp decline in certain economic metrics, followed by a sharp rise, followed again by a sharp decline, finishing with another sharp rise.
Deflation: Most of us are familiar with the concept of inflation, an increase in living costs. Whether modest or significant, inflation has been a way of life for Americans through recent generations. Deflation is the opposite — a period when prices for goods and services begin to fall. Deflation is typically associated with a decline in the standard of living, and some suggest that the risk of this has recently risen.
Market correction: When the stock market declines by 5 percent or more, up to 20 percent (as measured by a broad market index such as the Dow Jones Industrial Average or S&P 500), professionals generally describe it as a correction in stock prices.
Bear market: The generally accepted standard to qualify for a bear market is when stocks (as measured by an index) drop 20 percent or more in a set period of time, perhaps within two months or less.
Bubble: In economic terms, a bubble occurs when the value of a particular item or industry rises drastically over a short period of time, usually to unsustainable levels. In recent times, bubbles have occurred in the technology industry (the “dot-com” bubble of the late 1990s) and in real estate (the housing bubble that began to burst in 2007).
Derivatives: This is the name given to a contract between two parties that derives its price from an underlying asset. The value is based on changes in the prices of the underlying asset, which can range from hard assets like gold or agricultural products to interest rates and stocks. While they provide a way to hedge risk, more regulation may be placed on those that attract speculators, which some believe has caused problems in the markets.
High Frequency Trading: Much of the market’s recent volatility has been blamed on rapid trading strategies that large institutions execute through powerful computers. These machines can quickly crunch numbers to identify potential short-term price opportunities and then execute very large buy and sell orders. If it works right, it has the potential to generate significant profits for the firms doing the trading. Technology advances have made this a factor in the markets only in recent years.
Contact Dena Shapiro Frenkel, CRPC, Ameriprise Financial Services Inc., at 410-461-4270, Ext. 12, or dena.s.frenkel@ampf.com. Dena’s Web site is at ameripriseadvisors.com/dena.s.frenkel. This column is for informational purposes only.
