Yale Undergraduate Trading Club Newsletter 10/7
Key Moment, What to Look Out For, and Market Thesis by Max Tanksley (max.tanksley@yale.edu)
This Week’s Terms, Trading Tools, and Book Review by Alexander LaPratt (alexander.lapratt@yale.edu)
Key Moment:
On Friday October 4th, the Bureau of Labor Statistics released its September 2024 jobs report. In September, “total nonfarm payroll employment increased by 254,000”, beating economist expectations and causing equity markets to rally. This unexpected strength in the job market means that there is now a lower likelihood of another half point rate cut in November. If the intensity with which the fed began its easing cycle rankled some investors, this report shows that their concerns may have been unfounded – the US job market is surprisingly resilient, and the Fed appears to be in careful control of both inflation and unemployment
What to Look Out For:
At 3:00 pm on Monday, the September Consumer Credit report will be released. It’s no secret that Americans love to borrow money. Whether or not they continue to do so may shed some light on how they feel about an economy that is, according to all conventional metrics, strong.
At 8:30 am on Thursday, the September CPI report will be released. Year over year inflation has remained above the Fed’s 2% target, but their recent pivot signaled a belief that inflation has largely been tamed. Economists expect .1% CPI growth and .2% Core CPI growth in September.
This Week’s Terms:
CPI (Consumer Price Index): The CPI is a measure of the average change in prices over time that urban consumers pay for a basket of goods and services. Changes in the CPI are a key indicator of inflation.
Inflation: Inflation is the rate at which price levels increase over a given period of time, usually annually. Note that, by definition, inflation is a rate of increase. This means that, even when inflation falls, prices can and will continue to go up.
FOMC (Federal Open Market Committee): The FOMC is the policy-making branch of the Federal Reserve, responsible for controlling the money supply and effectively responsible for setting interest rates. The current chair of the FOMC is Jerome Powell.
Trading Tools: Fibonacci Retracement
Fibonacci Retracement levels are a tool used by technical traders to identify potential support and resistance levels. Based on the Fibonacci sequence, key levels like 38.2%, 50%, and 61.8% often indicate areas where price may reverse or stall.
How to Use: Draw Fibonacci lines from a recent high to low (or vice versa) to spot retracement levels. If the price approaches these levels, it may find support or resistance.
Example: A stock rallies from $20 to $30. It then begins retracing. It may find support at the 61.8% Fibonacci level at $24, resuming its upward movement.
A Market Thesis: It’s good that no one really feels good about the economy.
What do markets do when they receive new data that points to a likely interest rate cut? The answer is, like most things, it depends. On one hand, rate cuts mean that it’s less expensive to borrow money. Companies and consumers generally prefer to have cheaper access to capital than not, and for that reason they tend to like lower interest rates. Companies anticipate investing more, consumers anticipate borrowing and spending more, and the economy strengthens as a result. On the other hand, the fact that a rate cut is occurring means that the Fed believes in some way that the status quo is untenable. The Fed has a dual mandate — to maintain low unemployment and to maintain low inflation. If the Fed lowers interest rates, it believes that one of these metrics is in jeopardy. As a rule of thumb, I tend to believe that the Federal Reserve Open Market Committee knows more about economics than I do. I may strongly believe that the markets are terrific and will never crash again, but if Jerome Powell appears profusely sweating and nervous at his press conference, my outlook may rapidly change. These competing effects often make it difficult to judge how exactly the market will react to an announcement in the short term. This is all well and good, but you are probably asking yourself how this relates to a soft landing. The idea is this: If the belief that the Fed will achieve a soft landing becomes widespread in the markets before said soft landing occurs, then it will not happen. Economic theory suggests that expectations for future economic conditions drive the actions of market agents in the present. In other words, it’s priced in. However, if markets as a whole begin to price in a soft landing, businesses may overinvest, anticipating a boom in consumer confidence, and consumers may overborrow and overspend, anticipating continued economic tailwinds. In this case, the expectation of a soft landing may induce the inflation that prevents it from happening. Fortunately, Americans are uniquely confused at present. U.S. GDP is at an all time high, and inflation is falling towards the Fed’s 2% target. These are good economic signs. At the same time, most Americans are pessimistic about the economy: In May, a Pew Research poll found that only 23% of U.S. adults said the economy is in excellent or good shape. And, despite this pessimism, American consumers continue to spend. This economic confusion might just create the perfect conditions for a soft landing. If consumers feel cautious about the economy, but continue to spend, the economy is less at risk of overheating. If consumer spending continues to be strong but not runaway, it may create the ideal conditions for the sort of graceful deleveraging that so rarely occurs in American financial markets.
Book Review: “Market Wizards” by Jack D. Schwager
This week’s book recommendation is ‘Market Wizards’ by Jack D. Schwager, a classic for any aspiring trader. Schwager interviews some of the top traders in the world, diving into their strategies, psychological approaches, and the importance of discipline. Key takeaways include:
- Risk Management: Even the best traders lose money. It’s how they manage those losses that sets them apart.
- Adaptability: Markets change, and so must traders. Flexibility in your approach is crucial to long-term success.
- Psychology: Many traders focus on technical skills, but maintaining a disciplined and focused mindset is just as critical.
This book is highly recommended for anyone looking to understand the mindset behind successful trading.
Conclusion:
Thanks for reading the first edition of our newsletter! Be sure to join us at the next group meeting on Friday, October 11th to discuss these ideas further, or feel free to email us with your thoughts and questions.
Let’s keep growing and learning together!