Money Rehab with Nicole Lapin - The stock market just dropped. Why?

Episode Date: August 5, 2021

With the help of jugglers, winter jackets, and chickens, Nicole breaks down the market’s worst day of the year. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash new pros media. That's B of A dot com slash N E W pros P R O S media B of A dot com slash new pros media. Hey, money rehab fam. Before we start, I wanted to say thank you to all of you money rehabbers who have rated and reviewed the podcast. And because you are dear money rehab listeners are a huge part of the show, we're going to make you a literal part of the show today. And because it's weird to talk about myself, I'm going to have Mike, one of our amazing producers, do it instead. Take it away, Mike.

Thank you, Nicole. HandyTandy220 writes, I have searched high and low for someone who could explain 401k versus Roth IRA in an understandable manner. Found it here on Money Rehab. Thanks for taking the time to break it down. Exclamation point. Animal underscore Kingsley 12 says, Money Rehab has shaken me and changed my financial goals in a good way. Can't wait to see where this journey takes me.

Thanks for all the help. Locally underscore sourced 2763 says, I've really enjoyed this learning experience listening to Money Rehab. I've never really learned much about investing, but I love the way that Nicole dives into this topic and provides tips. I've been able to fill in gaps

and have begun to invest to help secure a better financial future for myself. Exciting stuff. Lily underscore lately says, the show is awesome. Between money rehab and Nicole's books, my life has changed for the better. Keep creating and sharing these fantastic little nuggets. Emily C says, I always recommend money rehab to anyone looking for a new podcast or someone that is questioning their finances. So many different financial aspects are portrayed on this show.

Also, Nicole is a genius, and you can tell that she actually cares about what she's doing. Thank you all for writing these stellar reviews. Now, please, enjoy the show. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k?

You don't do it? No, I never do it. You think the whole world revolves around you and your money. Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg.

The only financial expert you don't need a dictionary to understand. The Cole Lappin. 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 nerd out about most all of this stuff. But don't you find that phrasing fascinating? For me, the part that sticks out is Delta variant fears send out humbling. 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 that 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 you don't think the food will taste good. That's just not the way it works. In our everyday lives, the way we exchange money isn't determined by as many existential factors. Really, there are two rules that apply, 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 that jargon.

Even if this terminology is new to you, I'm sure the concept will make intuitive sense. Let's say you're in the business of manufacturing big, fluffy, delicious fleece-lined winter coats. You're based on the East Coast, which is perfect for your business. As the weather gets cold, or rather colder, 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 a demand for your product. And because there is a 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 chili folks looking for new winter coats have more choice, which means 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 competition. 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. Hold on to your wallets, boys and girls. Money rehab will be right back. Now for some more money rehab. Let's say that after a few months of trying to compete with the

winter coat newbies, you say, screw this. The East Coast is too saturated with coats. I'm going to pick up shop and I'm going to move to the other side of the country where I don't have to worry about excess supply. And just like that, you're outie 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 will also be a lot less demand because hello, sunny California. So because the weather's less cold, you no longer have a hot product. Therefore, the price will need to come back down. And this is the opposite situation as before, right? Stellar supply, sucky demand. Within the system of supply

and demand, there's a money paradigm I want you money rehabbers 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 customer and can call the pricing shots. But if a company is selling a type of product that's readily available and there is low or even steady demand, that's when us, le consumers, call the shots on pricing. Okay, so here's where it gets fun or really, really fun. This is not just a financial trend. It's also true in social behavior, where instead of looking 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 were an excellent juggler. If you go to an average social gathering and you whip out eight oranges and you start juggling said oranges, you, my friend, will be the belle of the ball. The supply of fellow jugglers in just an average social gathering is probably slim to none. But there's a demand to be entertained. Therefore, you, the provider of the entertainment, gets the group's undivided attention. No one will be able to take their eyes off you or the oranges.

But if you pull the same citrus trick at a circus convention, you're probably going to split the audience with about a dozen other jugglers. Because while there's perhaps the same demand to be entertained, there's now a whole pack of orange juggling jugglers. So you no longer have the same market cornered. Bet you didn't think you'd get a lesson on juggling today. But Wall Street 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 little 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 disruptions if COVID cases continue to rise? You thinking travel? Yep. According to the same Washington Post article, Carnival Cruises dropped almost 6% and United Airlines dropped 5.5%. Oil prices also fell. Brent Crude, the international oil benchmark, dropped almost 7%. 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? 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 boundaries 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 dominoes

needed to produce this egg price domino effect. Instead of tracing 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, as it does, by the way, all the time. 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. For today's tip, you can take straight to the bank. If you've been getting your investing on and you're feeling confident about handpicking

some companies to invest in, Think about the supply chain before you invest. What do you think will change in the next 5, 10, 20 years? When you read the news, put on your money rehab lens and think about 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. Money Rehab is a production of iHeart Media. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Catherine Law. Money Rehab is edited and engineered by Brandon Dickert with help from Josh Fisher.

Executive producers are Mangesh Hatikader and Will Pearson. Huge thanks to the OG Money Rehab supervising producer, Michelle Lanz, for her pre-production and development work. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.