What happens next for the markets and why it’s crashing.
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WHY IS THE MARKET CRASHING?
The market is finally realizing that Fed Chairman Jerome Powell is going to increase the rates and the market is not liking it.
WHAT? DIDN’T WE ALREADY KNOW THIS?
YES! We did. Fundamentally there’s nothing new that has changed other than “market sentiment” (fancy for the market is getting emotional). First, let’s talk about how we got here.
HOW WE GOT HERE
Federal fund interest rates drop to 0, 14 trillion dollars injected into the economy – companies became super profitable, stock market went to an all time high, demand went through the roof – employment and compensation went to an all time high – but we forgot that things keep going up forever.
WHERE’S THE DATA?
Looking back as far as the 1960s, you can see capital velocity was 1.7 – it stays there for a few decades before reaching the peak of 2.1 in 1997, we get the Dotcom bubble, the 2008 financial crisis, and then we get the rony rona. Here’s where we are now – 1.1: https://fred.stlouisfed.org/series/M2V
This means people are starting to get worried – they don’t know how this movie is going to play out. And we can see this on google trends too. Mortgage loan searches are at a 5 year low, car and auto loan searches are at a 5 year low. My ad revenue here on YouTube – is down 28% from where it was.
This means companies are spending less money on advertising. This tells us at best – companies are saving money for a potentially hard year, or at the worst – they’re preparing for something bad.
WHAT ABOUT INFLATION?
Think about this: if the Fed really wanted to stop inflation, wouldn’t they have to increase the rates in equal proportion to inflation?
In the 1970s, when inflation hit 11%, the Federal Reserve chairman at the time – Paul Volker had to increase rates to 20% to fight inflation. We don’t have 11% inflation, we have 7% – so we’d have to raise rates way more.
Why then – would the Fed only want to raise rates by 1 or 2%? That won’t do anything to stop inflation. The reason is, because Jerome Powell believes that we’re in demand-pull inflation thanks to supply chain problems and that they will work themselves out through normal supply and demand.
WHAT’S ALL THIS TALK ABOUT NETFLIX?
Because it was this past week that was a wake up call when Netflix fell 23%. From January to March – they forecast 2.5 million new subscribers to be added instead of the 5.9 million that analysts predicted they would add.
The reason that’s a big deal is because analysts use projections of big companies – especially tech companies – to foreshadow what could happen to growth in the future. Their assumption is if Netflix is predicting such slow growth, well that’s not looking good for everyone else.
SO WHY IS THE STOCK & CRYPTO MARKET CRASHING?
This week we’re getting company earnings, big company earnings. The reason why earnings are scary is because if earnings are good then it signals to Jerome Powell we’re doing great, employment is back to pre pandemic, it’s a strong economy, people are making money and that the Fed more reason to raise the rates confidently and maybe even earlier than expected.
The market doesn’t like that (remember rates going up is bad for investor mentality). But if the earnings come out and we see they are below expectation then that can reinforce the idea that “we’re about to be in a recession”.
HAVE WE BEEN HERE BEFORE?
Between 1989 and 2022, there were 6 rate cut cycles (when interest rates fell) and the average return for the S&P500 was 21.2% – not bad. Let’s compare that to where we are now.
Let’s look at rate hike cycles which is what’s about to happen (interest rate increases). Between 1994 and 2019 there were 5 rate hike cycles – the average return for the S&P500 was 62.9%. Almost 3x as good which means – while everyone is expecting the price of the stock market to fall this year – it might go in the exact opposite direction in the long term: https://on.mktw.net/3KEwV92
*None of this is meant to be construed as investment advice, it’s for entertainment purposes only. Links above include affiliate commission or referrals. I’m part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.