Welcome to today’s edition of Lemonade Stand Finance!

Those who have read our past editions will know that I keep writing about inflation, interest rates, and energy prices.

I’m doing this because I can’t stress enough how important these 3 key inputs are to stock prices. 

Here’s how it works.

1. Oil Prices and Inflation: When oil prices go up, so does inflation. This means things get more expensive. Why? Because oil is used in making ALMOST EVERYTHING, from the products we buy to the energy we use. So, when oil is pricey, it costs more to make stuff, and then companies have to charge more to make a profit.

2. Inflation and Interest Rates: High inflation usually leads to higher interest rates. Here's how: The Federal Reserve (they're like the money managers of the U.S.) tries to control inflation by making it more expensive to borrow money – that's what raising interest rates means. When it's more expensive to borrow money, people and companies spend less, which can help slow down inflation.

3. Interest Rates and the Stock Market: So, why do higher interest rates matter for stocks? Because when borrowing money becomes more expensive, it can slow down the economy and affect how much profit companies make. This can make investors nervous, and often, they might sell their stocks, causing stock prices to drop.

For more on this relationship see this article.

The Wall Street Journal published an article today titled: “Why the Stock Market Keeps Changing Its Story” that perfectly explains what's happening in the stock market, and you'll notice it centres on the crucial relationship between inflation, interest rates, and energy prices.

let’s get into it!

Case Study: “Why the Stock Market Keeps Changing it’s Story”

Summary

• In 2024, the stock market is weaving a new story, notably featuring Exxon Mobil.

• The oil giant's shares have surged an impressive 21%, challenging the tech sector's longstanding dominance.

• This significant rise in Exxon Mobil's stock value isn't just a fleeting trend; it represents a substantial shift in the market's dynamics.

• Previously, the market was largely driven by big tech companies like Apple, Amazon, Google, Nvidia, Tesla, Meta, and Microsoft.

• Now, Exxon's rise is drawing attention to the energy sector, an industry once overshadowed by tech's rapid innovations.

• This change reflects deeper shifts in economic trends and global energy patterns, suggesting a move towards a more varied range of investment interests and strategies.

• This evolution in the stock market narrative invites a closer look at the factors behind it and what they mean for investors and the overall market.

Educational Insights

1. Global Economy’s Role: Exxon's stock rise reflects a strong global demand for oil, signaling that the world economy might be doing better than many had predicted. When there's more demand for oil, it usually means businesses and people are active, traveling more, and consuming more energy.

2. Oil Supply Challenges: The stock jump is also tied to supply issues. Wars and conflicts in major oil-producing regions like Ukraine and the Middle East are disrupting the normal flow of oil, making it scarcer and pushing prices up.

3. Shift in Market Focus: For a long time, tech companies dominated the stock market’s spotlight. But now, with Exxon’s rise, there's a noticeable shift toward traditional sectors like oil and energy. This suggests a broader change in what investors are focusing on in the market.

4. Inflation Concerns: The rise in oil prices, indicated by Exxon’s performance, can contribute to overall inflation, making everyday items more expensive. This is something the Federal Reserve watches closely, as it impacts the overall economy.

5. Predictions for the Market: The situation with Exxon suggests that investors might need to be ready for more changes in the market. If oil prices keep rising, it could lead to more inflation, which might affect how the Federal Reserve adjusts interest rates in the future. Higher inflation leads to higher interest rates, and thus lower stock prices.

Jargon Explained:

• Bullish Market: This term describes a stock market where investors are confident, leading to rising stock prices.

• Geopolitical Tensions: These are political conflicts between countries that can affect global markets, including oil prices.

• Inflation: The increase in prices over time, which means that money buys less than it used to.

• Federal Reserve: The central bank of the United States, which plays a major role in controlling inflation and managing the country's monetary policy.

• Rate Cuts: These are reductions in interest rates set by the Federal Reserve, often done to stimulate economic growth.

That’s it for today.

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