Wondering why the stock market dropped? Read me!

July 19th was the stock market’s worst day this year… and, according to most major news outlets, that drop was attributed to the Delta variant of covid-19.

When the stock market dipped, the Washington Post published an article with the headline: “Delta variant fears send Dow tumbling more than 700 points in worst one-day decline of 2021.”

I know that my threshold for what makes an interesting headline is lower than most... I will admit, I nerd out about most of this stuff. But don’t you find that phrasing fascinating?! For me, the part that sticks out is “Delta variant fears send Dow tumbling…”

Even if Washington Post headlines aren’t your cup of tea, you have to be intrigued by the multitudes that headline contains. Basically, what that headline is oh-so-casually stating as fact is: the fear of a possible future outcome can affect how companies make money in the present. And even deeper, how the psyche of the country affects the health of the economy.

This is the kind of stuff I love to think about… because it is so not how the world (especially the financial world) typically works. When we’re taking a stroll through finance land, most of the time, what we encounter is very much dependent on the reality of the present… rather than our projection of the future.

For example, can you imagine a world in which the price of college tuition dropped because a parent expresses concern that their kid won’t get a job after graduation? Maybe that should be happening… but it’s not. Or, imagine if you order delivery from a restaurant... and the restaurant gives you a few dollars off because when you ordered, you said that you don’t think the food will taste good. It’s just not the way things work.

In our day-to-day lives, the way we exchange money isn’t determined by as many existential factors. Really, there are only two rules: supply and demand.

That’s the shorthand for the economic principle that things that are scarce and desired, tend to be valued higher than things that are available and neutral.

Let’s take a step back from the jargon. Even if this terminology is new to you, I’m sure this concept will make intuitive sense.

Let’s say you’re in the business of manufacturing big, puffy, fleece-lined winter coats. You’re based on the East Coast, which is perfect for your business. As the weather gets cold (or rather, cold-er), you know you’re going to have a lot of chilly people lining up outside your door to snuggle up in one of your jackets. So there is demand for your product. And because there is demand for your product, you can make your price tag pretty much whatever you want.

But then, copycats catch on to your big break. You know what they say, imitation is the sincerest form of flattery… so feel very flattered when a store for winter jackets pops up on every block.

In this case, with the rush of competition, the supply of winter jackets is now booming. Therefore, all these East Coast popsicle people looking for a new coat have more choice... which means that they might not choose you. So to win them over, you will likely need to slap a smaller price tag on your product so that you can get an edge over your competitors.

So in that scenario, the demand was stellar but the supply was sucky. But the scales don’t always tilt in that direction… in fact, they could just as easily go the other way.

Say that after a few months of trying to compete with the newbies, you say, “Screw this, the East Coast is too saturated. I’m going to pick up shop and move to the other side of the country where I don’t have to worry about excess supply.” And then just like that, you’re outtie 5,000.

If you headquarter your winter jacket spot in sunny southern California… sure, there will be less supply which will allow you to jack your price back up… but there’s less demand because it’s… sunny California. So, because the weather’s less cold, you no longer have a hot product. Therefore, that price will need to come back down.

And this is the opposite situation as before, right? Stellar supply, sucky demand.

Within this system of supply and demand, there’s a power paradigm I want you readers to look out for. If a company is selling a type of product with limited supply and increased demand… the company has the upper-hand over the consumer, and can call the shots on pricing. But if a company is selling a type of product that’s readily available, and there’s low or even steady demand… then that’s when us, the customers, call the shots on pricing.

Okay - here’s where this gets fun. This is not just a financial trend, it’s also true in social behavior… where instead of looking at how price is affected by supply and demand, the variable is something more human, like attention, or attraction.

For example, do you have a secret talent? Let’s say you’re an excellent… juggler. If you go to your average social gathering and whip out eight oranges and start juggling… you, my friend, will be the bell of the ball. The supply of fellow jugglers is… slim, but there’s a demand to be entertained. Therefore, you, the provider of the entertainment, get the group’s undivided attention. No one will be able to take their eyes off of you.

But… if you pull the same trick at a circus convention, you’re probably going to have to split an audience with about a dozen other jugglers. Because, while there’s perhaps the same demand to be entertained, there's now a pack of jugglers, so you no longer have the market cornered.

Bet you didn’t think you’d get a lesson on juggling today, but Wall St is basically a circus, so in the world of money, you should be prepared to juggle some lessons... and meet some clowns.

Anyway, you get it. Supply and demand. They rule everything.

The stock market is an interesting exception because price can fluctuate depending on how people project supply and demand will change.

With that in mind… let’s play a game. Can you guess which companies took the biggest hit in this latest stock market hiccup? Remember: this dip was attributed to concerns over covid. I’ll give you a hint… which industries might have supply or demand disruption if covid cases continue to rise?

Are you thinking travel? Yep. According to that same Washington Post article, Carnival Cruises dropped almost 6 percent and United Airlines dropped 5.5 percent. Oil prices also fell. Brent crude, the international oil benchmark, dropped almost 7 percent.

So investors are always trying to project supply and demand, and therefore, the stock market becomes very sensitive to factors that may feel totally out of left field.

For example, the weather. Yes. The stock market tends to make like the sun and dip when a storm rolls through.

You might be thinking: wait - what? How does the weather in Iowa affect the price of eggs in Florida? Well, If you’re forecasting the price of a product, there is so much more than geographic borders and industry trends… there may be connections in the supply chain that you don’t see when you’re shopping in the grocery store.

Iowa is one of the major hot spots for corn in the country. If there are intense weather patterns, farmers won’t be able to harvest or export their corn down to Florida, where a poultry farm is using Iowa’s corn to feed their chickens. If chickens aren’t fed well, they will produce fewer eggs… and if they produce fewer eggs the supply is lower, meaning the price of eggs will go up.

With covid, there are fewer dominos needed to produce this egg-price domino effect. Instead of tracing the egg prices all the way back to Iowa, egg prices may be affected just because that farm in Florida can’t distribute their eggs as often because of quarantine requirements… which, as we now understand, means lower supply, and surged prices.

But - for now, we can take a deep breath, because I have some good news: the Dow quickly recovered from this dip. By the very next day, the Dow rebounded 500 points. But we’re not out of the woods quite yet… you can expect the market to remain a bit volatile while a better strategy for managing with the Delta variant is put in place.

So, if you’ve been getting your investing on and you’re feeling confident about hand-picking some companies to invest in, think about the supply chain before you invest. What do you think will change in the next five, ten, twenty years? When you read the news, put on your Money Minute lens and think how events in the news will affect the stock market. Is the government going to dedicate more funding to a certain industry? Is there new legislation banning certain types of products? How might that affect the companies you want to invest in? And, before you close out of your news app... don’t forget to check the weather.

xo,

GIF Credit:

Gilmore Girls - Giphy

Kim Kardashian 1 - Giphy

Kim Kardashian 2 - Giphy

Kim Kardashian 3 - Giphy

Kim Kardashian 4 - Giphy

Juggling - Giphy