Ever want to know financial terms, but you were afraid to ask? During the pandemic, a lot of words are cropping up that may be hard to understand. In middle school, I was challenged by vocabulary, as my scores showed. As a result, I carried a dictionary to school when I was in college or graduate school. The coronavirus has been enough of a hardship to overcome. Explaining these key terms you need to know is one job I can handle to navigate these waters better.
17 Financial Terms To Know:
A bailout provides financial liquidity to people, companies, or countries on the verge of bankruptcy. Being strapped for cash due to losing your job or a drop in revenues create hardships and the need for immediate help. This financial assistance can take many forms and from different entities. Recipients may get cash, loans, bonds, or stock purchases. The Federal Reserve and the US Treasury have provided significant liquidity. Congress passed the CARES Act containing a stimulus package. There will be more aid in 2021, given the severity of this downturn.
Bailouts were controversial for banks and other financial institutions during the 2008-2009 Great Recession. The current bailout recipients have varied based on the coronavirus’s broad impact. Bailouts, or allocations of money, have gone to large corporations like airlines. Like New York, several states have significant needs because of denser populations but, haven’t yet received the money. Hence, “Blue State Bailouts.” This is an unfortunate term. Asking for financial assistance to fund essential public employees sounds like a necessity.
2. Bear Market Rally
A bear market rally occurs during a bear market (I know, duh) when there are increases of at least 10% in prices of stocks, bonds, or indexes. Our latest bear market began for the Dow Jones Industrial Average on March 11th, followed by the next day’s S& P 500 index. The market continued to drop to its lowest level on March 23, 2020. From that trough, stocks rallied through 2020 and up 16.3% for the year.. That is the epitome of a bear market rally.
3. Bear Market And Bull Market
We had been in a bull market for so long that a bear market had become increasingly inevitable. A bull or bear market rises or falls 20% or more. The “bear” market term came from the early 18th century. Daniel Defoe said: “Thus every dissembler, every false friend, every secret cheat, every bear-skin jobber, has a cloven foot. The bear market was first popularized by a huge market crash known as The South Sea Bubble of 1720.
There is more to the history of the origination of bulls and bears here. Envision these animals’ movement: bears swipe their paws downward while bull horns rise.
4. Black Swans
A black swan event is an event that comes as a surprise (can be negative or positive) that has a significant effect impact of potentially ground shifting magnitude. The term is an ancient saying that relied on black swans not existing in contrast to the more common white swans. However, Dutch explorers were reportedly the first to see black swans in Western Australia in the late 1600s. The rareness of black swans became a metaphor for unpredictability.
Nassim Nicholas Taleb wrote of its theory in his book, “The Black Swan: The Impact of the Highly Improbable.” He argued black swan events have three characteristics:
- Massive impact; and,
- After the fact, an explanation is concocted that makes the event appear less random.
Some examples of black swan events are the rise of the personal computer, the Internet, September 11, 2001, World War I, and the 2008-2009 financial crisis.
Black swans are usually labeled after the event has passed. However, many pundits have immediately referred to the coronavirus-related pandemic as a black swan event. However, it is not clear it is so. Did you know there are white swans and gray swans beside the black version to reflect differences in predictability? Geary Sikich elaborated on these other swans providing the guidance we share here.
White swans differ in using the three principal characteristics used for black swans but reflect:
- Highly certain events;
- Carrying an impact that can be estimated; and
- Later, the focus shifts to errors in judgment or some other human form of causation.
On the other hand, a gray swan is a highly improbable event that fits black and white swans. Using the same three characteristics, the event is:
- Highly probable;
- Its impact can quickly cascade; and
- Like the white swan, the focus shifts to errors in judgment or some other human form of causation.
The Pandemic Is Probably A White Swan
Calling COVID-19 a black, gray, or white swan event may be premature. Were this virus and its effects foreseeable before its arrival? Taleb believes so. He believes the coronavirus pandemic is a white swan event because it was predictable. As a co-author in this January 2020 paper, Taleb issued a warning to prevent the worldwide coronavirus spread virus in Wuhan, China.
There were plans to prevent such a pandemic back in 2017. Recently, it became more known that Obama officials briefed Trump’s team to go through a hypothetical virus pandemic scenario. At this gathering of both teams, members considered the possibility of shortages of ventilators. The goal was to model such a scenario similar to the coronavirus we have now. Those who were there assumed the virus would appear in Asia before making its way to the US. These meetings should have been a valuable exercise. Instead, according to mixed reports, there were few accomplishments at these sessions.
5. Business Interruption Insurance
Many businesses buy interruption insurance to cover losses from lower revenues, fixed costs, or temporary relocation of operations. Typical commercial leases require this coverage. Insurance usually covers losses such as fire, natural disasters (e.g., Hurricane Katrina or Sandy), or potentially a virus pandemic. An important question is whether the insurance policy explicitly addresses viruses as a possible event.
It would be highly unusual for a virus to be specifically named. On the other hand, businesses with the SARS outbreak in the early 2000s may have adjusted their contracts to delineate viruses as a potential risk. The 2011 tsunami in Japan is another monumental example that interrupted businesses. So were those businesses covered then? I would be willing to bet that insurance companies will be scrutinizing all their contracts. They will attempt to decline coverage for this current crisis.
6. Deferred Interest
Deferred interest comes into play when interest has accrued, but there is a delay in the payment period. Typically, borrowers pay interest charges monthly. In some cases, lenders may agree to defer the interest. You will usually remain responsible for this accrued interest. Eventually, you will pay this interest. However, there are exceptions to this. The CARES Act allowed deferral interest on most federal student loans, with accrued interest beginning September 30, 2020.
Related Post: A Letter To College Students During The Pandemic
7. Economic Stimulus
Stimulus actions can be taken by the Federal Reserve (the Fed) or by the US Treasury to help the economy. The Fed can implement measures through its stimulative monetary policy. Similarly, the Treasury’s fiscal policy can budget for stimulus packages with Congress. During the Great Recession, the Fed took aggressive action such as quantitative easing (QE) to provide our financial system liquidity. Quantitative easing is a fed tool used to aggressively purchase government (and other) securities from commercial banks. The Fed is essentially providing funds to the banks, encouraging them to use this money to increase lending.
The CARES Act was a $2.2 trillion package rolled out in 2020. More financial funding will be forthcoming to those unemployed and small businesses. Stimulus checks or economic impact payments will be directly deposited in recipients’ bank accounts or sent by check.
8. Emotional Contagion
Emotional contagion resulted from the coronavirus spreading to a significant global population. This phenomenon occurs when these individuals’ emotions and behaviors spread to other people. The round-the-clock news cycle and social media produce viral images continually showing quiet streets, people wearing masks, and ads providing instructions on washing your hands. The rise of anxiety, depression, and fear further amplify our vulnerable feelings. These are examples of emotional contagion.
9. Flight To Quality Or Safety
When markets become volatile and stocks decline, investors seek quality and safety from other securities. Turbulence happened in March 2020 as our stock market moved from a bull to a bear market in weeks. At times there may be several factors that converge on the markets, which add substantial risk. These issues could be rising interest rates, a slowing economy, and reduced earnings estimates for the upcoming quarters.
In declining markets, investors tend to rotate out of specific sectors like tech growth stocks and flock to safer stocks with above-average yields. They may even move out of the equity markets and put money into Treasury securities. In 2009, as the housing sector weakened, leading up to the Great Recession, buyers sought refuge in Treasury securities. Our markets will likely remain volatile, reflecting headline risk. As the knowledge of our substantial unemployment sinks in, investors may take that flight again.
When a borrower has difficulty making loan payments, they may ask their lender for forbearance. Lenders may agree to a forbearance request rather than seeing the borrower(s) heading into bankruptcy, where recovery gets tougher. The Fed has urged lenders to be “responsive to the needs of low- and -moderate-income individuals, small businesses, and small farms affected by COVID-19 consistent with safe and sound banking practices.”
Our CARES Act addresses federal student loans that are in forbearance. Forbearance occurs when payments pause without interest accruing until a specific date.
11. Force Majeure
Force majeure is a French term often interchangeable with Acts of God. The coronavirus pandemic has certainly impacted businesses around the world. Many companies have found it difficult-to-impossible to maintain full operations and fulfill contractual obligations. Force majeure is a fairly common clause found in contracts. How it applies may be specific to the contract. An attorney may need to raise appropriate questions. They may ask if the coronavirus qualifies as a force majeure event and was performance impossible? How foreseeable was the risk of COVID-19 (see Black Swan above)? Firms usually have business interruption coverage ( see above) as well.
12. Furloughs Have Become More Common
We hear companies announce furloughs plans often. Companies continue to look for ways to reduce their costs as lower consumer demand has resulted. Generally, furloughs are mandatory time off from work without pay. Furloughs or releases are not layoffs as employees retain their jobs, benefits, and any employee rights. Temporary layoffs are furloughs so long as employees expect to return to work at the end of the period. Many industries use releases when they see reduced demand either seasonally, a cyclical downturn, a union strike, or an emergency such as COVID-19. It could be for a fixed term of two weeks or longer or a particular day, such as all Fridays in the summer.
A furloughed employee typically expects that they will return to work. They retain their jobs and return at a specific time or a condition that ends their release time. That could mean the strike is over or demand for services or products has returned. When the employees are out of work, they retain some of their benefits, notably health or life insurance. Furloughs are not usually COBRA qualifying events, but it is always best to check with your respective employer.
What About Retirement Benefits?
Retirement benefits may pause for employees on leave. Workers typically make contributions to their 401K employer-sponsored plan via their paychecks. However, if they aren’t making money, they are probably not making contributions. Neither will their employers make match contributions during furlough periods. On the other hand, employees may seek part-time employment or new jobs altogether. Depending on how long the leave, this can slow growth in your retirement accounts.
13. Initial Jobless Claims For Unemployment Insurance
Average weekly initial jobless claims reflect the number of people filing for unemployment insurance for that week. It is a leading indicator that predicts future economic activity. In past months, the claims have been staying stubbornly high. The latest US Labor Department reported close to one million new signups for unemployment.
High unemployment rates rise during recessions. It peaked at 10% during the Great Recession. During the Great Depression, unemployment reached a rate of 24.9% in 1933. That said, we never have zero unemployment as companies move their businesses around, close unproductive firms causing frictional job losses for some employees.
Claims for unemployment insurance will remain high for the foreseeable future. Make sure to take advantage of these benefits. The US Department of Labor lists eligibility requirements on its website. We explain here, but you do need to check your respective state’s instructions. Look for the individual state standard in which you worked using CareerOneStop, which provides each states’ rules.
Unemployment Benefits Eligibility
You are eligible for benefits if you are unemployed through no fault of your own. Typically, you cannot file if you were fired or let go for “gross misconduct.” Please note that you should apply in any case because the firm must prove gross misconduct in most cases through a lawsuit. Relaxation of rules has been common during the coronavirus timeframe.
While there is federal guidance for eligibility, each state has its minimum requirements that a candidate for unemployment insurance benefits must satisfy. Each state varies regarding minimum time worked and wages. States pay the unemployment benefits to the claimant typically for 26 weeks. As a result of the CARES Act, the relief package provides an additional $600 per week in unemployment paid by the federal government until July 31st. This is in addition to the extended 39 weeks of state unemployment payments.
The federal government provided this kind of financial support during the Great Recession as well. They extended the unemployment insurance period to the standard 26 weeks given by states for a record total of 99 weeks.
Related Post: Why Unemployment Matters
14. Lockdown or Stay-In-Place
The notion of a lockdown always sounds ominous when used for potential terrorism at schools, offices, or airports. Currently, lockdowns or stay-in-place orders have been used as an emergency protocol to encourage people to stay at home. Lockdowns prevented the spread of the coronavirus to an extent.
Beginning in China, then expanding into the largest global lockdown ever, it has brought the global economy to its knees. Some countries have been gradually lifting their respective lockdowns. The US has introduced phased guidelines for states to emerge from the lockdown though no state is fully open as of yet.
15. Margin Calls
Don’t do it! Sorry, that was a reflex reaction I have to that term. When buying shares in a company, you may use some of your own money and borrow the rest from your broker. Margin calls are an extension of credit, with the securities acting as collateral. When the company’s shares decline in price, your broker will ask you to put up more money towards the borrowed amount or to sell the shares. The broker uses margin to protect themselves from losses on loan to you. Both the Fed and FINRA set industry rules for investing in the market. Your broker usually sets the minimum margin requirement. They could be stricter than federal guidelines.
Margin buying offers higher profits and higher risk through the added leverage. By paying only a small portion of the total amount, investors amplify their purchasing power. However, when financial markets are volatile, brokers make margin calls. These calls boost the losses suffered as well. Margin interest rates for Charles Schwab are effectively around 8% on small debt amounts, declining to 6.575% for debit balances under $500,000. The higher the amount borrowed, the greater the risk. Given these risks, I have always avoided using margin to buy stocks.
16. Price Gouging
Many people have been experiencing price gouging as shortages increase. Certain products such as paper goods, sanitizers, masks, and PPE (personal protective equipment) necessities have been in low supply. Price gouging occurs when a seller increases goods, services, or commodities in response to unusual demand due to lack of supply. Gouging is when prices elevate to unreasonable or unfair levels. As the virus affects worsened, there were reports of people hoarding some of these products and selling them at absurd prices. Besides being morally wrong, price gouging is illegal according to respective state statutes in effect.
17. Recession: Are We There Yet?
All this talk about an economic downturn requires some clarity. Are we already in a recession? A recession has at least two sequential quarters of negative economic growth measured by GDP (gross domestic product). We are technically in a recession with requisite economic indicators of weak growth and unemployment. Of course, we are in a recession with roughly 11 million people unemployed. Consumer demand is lacking, and with high initial unemployment claims still at high levels. Depressions are far more severe than recessions and last far longer. The Great Depression lasted ten years.
The current recession is not the typical kind caused by cyclical demand shrinking. This downturn is associated with a coronavirus pandemic, requiring lockdowns and changes in consumer behavior. While our economic downturn began in response to a health crisis, it has impacted supply (e.g., shortages) for what we need or reduced demand as we have remained home. If not working remotely or are essential, a significant portion of our workers may be out of jobs through furloughs or layoffs.
Financial terms related to the pandemic have been expanding our lexicon. Knowing these terms are useful to know when you participate in the market or need to understand your insurance situation. Many of us never heard of coronavirus before the pandemic. Now many of us have a working knowledge of medical technologies involved in vaccines and their development. I hope this list helps. Thank you for reading! Sign up today for your weekly newsletter!
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With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.