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For Teachers: Lessons on the Service Sector

The Stock Market Game Program

It was a super week for New York football (the New York Giants won the Super Bowl) and New York democracy (the New York state presidential primary during Super Tuesday), but for stocks, not so much.

On Tuesday, Feb. 5, here in New York, 2 million of our closest friends joined us in the Canyon of Heroes (lower Broadway) to hail the most unlikely of heroes (the Giants who beat the seemingly "perfect" New England Patriots). But over at the corner of Wall and Broad, a wave of fear washed over the New York Stock Exchange trading floor as the Dow lost 300 points. The Nasdaq and S&P didn't fare any better.

What had traders so frantic was the jaw-dropping fall in the Institute for Supply Management's nonmanufacturing survey (see "Weak Data Send Stocks Reeling"). The survey is sent to service sector business managers across the country. The service sector represents 70% of our economy. The ISM's non-manufacturing survey asks purchasing managers how many orders they think they will place in the next month. Thus, the survey is thought to be a predictor of business activity in the economy and it recorded the worst month-to-month loss since its inception in 1998 and the worst reading since Sept. 11, 2001. So what does this mean?

For many months now, there's been a debate in the financial community about whether we were headed for a recession or whether the "Goldilocks" economy would continue. The Goldilocks economy is a term used to describe steady economic growth with low inflation , in other words "just right." This is the kind of economy we have had since 2003. Many believe last week's ISM number is predicting recession and a bear market . This emboldened the bear who scooped up Goldilocks into his jowls and has been shaking the life out of her on the trading floor all week.

But Goldilocks may still have some life in her.

There have been freakish drops in the ISM number before that ended up signaling nothing. Plus, optimists (bulls) will tell you, the respondents to the survey send their reports to ISM early in the month. Therefore, respondents would not have been aware of the recent Fed rate cuts and the stimulus package approved by Congress on Thursday, Feb. 7 (see "Congress Passes Stimulus Bill"). This, bulls argue, would make their predictions unreasonably dour given subsequent events. So there's still hope, but it may be fading fast. So, what to do with your students?

We recommend three lessons in the Stock Market Game curriculum: "What is an Exchange/Market?" will help students understand how markets work; "Dividends and Earnings " will help them research to find companies that have positive stories in this difficult environment; and "What is Diversification ?" will help them spread their risk , making them less vulnerable to market volatility . All these lessons can be found by logging into the Teacher Support Center and clicking on "Lesson Sequence."