Wall Street Lingo Translated
For most people trying to get a handle on the world of Wall Street, the task of working one’s way through the mass of available information is difficult enough, but when most of it comes with terminology that’s anything but obvious, the task can be overwhelming. With that said, here are a few plain English explanations to help you understand.
When the market averages appear to be rising well above historical valuation ranges, this is referred to as a bubble. The best-known bubble of recent decades was that of the dot.com era at the turn of the millennium. That was a time when concepts were viewed as more important than underlying progress in sales and earnings. Not surprisingly, the follow-up to the dot.com bubble was a decade in which the market averages gained little ground, allowing increasing corporate profits to climb sufficiently to return valuations to normal.
Bull Market and Bear Market
The acknowledged definition of these phrases is a 20% gain or loss, respectively, from the latest inflection point (major change in direction) of the market. A drop in the Dow Jones average from 35,000 to 28,000 would signal a bear market. If the Dow then rose from 28,000 to 33,600, that would signal a new bull market. In both cases, however, much of the rise or fall would have taken place before reaching the signal point. Declaration of a new bull or bear market is not a worthwhile basis for buying in or bailing out.
Dead Cat Bounce
During periods of extended market weakness, there are occasional days of apparent market strength. They take place now and then until the market regains its footing and resumes its long upward course. They usually do not signal a change in the market’s direction.
Dogs of the Dow
This is a strategy that focuses on the 10 highest-yielding stocks in the Dow Jones Industrial Average. Every year, the portfolio is rearranged to maintain that focus. It is, essentially, a concentration on the best values since high dividend yields go hand in hand with low valuations. Over extended periods of time, the results of this approach have tended to be better than average, but there have been multiyear spans when the Dogs approach has underperformed.
I did a 20-year study of the high dividend approach using the highest dividend yielding stocks (10% of the total = 50 stocks) in the Standard & Poor’s 500 Index. The result: Over the whole period, the highest returns were from the highest yielders, but as was the case with the Dogs strategy, there were shorter times when the approach was less successful.
Flight To Safety
Periodically, especially during periods of market weakness, investors will bail out of equities and redeploy to the highest quality investments, e.g., Treasury securities.
A correction takes place when the market average drops more than 10% from its latest high. Over time, corrections have taken place in at least two out of every three years. Most of the time, a market correction does not lead to a bear market.
Priced For Perfection
Questions? Please contact me at email@example.com
N. Russell Wayne, CFP
Sound Asset Management Inc.
Weston, CT 06883