The New Stock Market World Order Has Begun | Recession Warning

What's up, guys? You here? And, uh, well, this escalated quickly. In the span of one month, mortgage rates have climbed to their highest level in a decade. Morgan Stanley warns that a bear market rally is setting the stage for a correction, with even more changes coming soon. BlackRock came on record to say that a new world order is coming soon for stocks and bonds, and I agree, because what's helped over the last two years is going to be entirely different from what we end up seeing in the very near future.

So, let's discuss what's going on, how big of a deal it is to see a changing world order in the markets, and how you could prepare with this information ahead of time to make money or, I guess, not lose money depending on your perspective. Because if you don't lose money, that's extra money that you've made, right? Anyway, all of that and more on this episode of "The Economy Still Makes Absolutely No Sense." But it does make sense to subscribe and smash the like button for the YouTube algorithm, because it does help off the channel tremendously. So, thank you guys so much, and also a big thank you to Wealthfront for sponsoring today's video - but more on that later.

Alright, so to bring you up to speed, there have been a lot of fundamental changes to the market that you need to be made aware of, because once you understand how this works in the next 90 seconds, everything else is going to begin to make a lot of sense. Since March of 2020, the Federal Reserve was purchasing 120 billion dollars a month of both treasuries and mortgage-backed securities in an effort to provide stimulus to the market, to provide a smooth transition throughout a shutdown. But as we've all seen, an unintended consequence of this is record high inflation.

So, in response to that, they've laid out a roadmap to conquer rising prices, and that consists of four main changes that will affect all of us over the next few years. First, they will end their bond buying. This was the process where the Federal Reserve was actively buying bonds, constantly introducing more money to the economy and artificially keeping interest rates low so that more people would have more access to more money. But that's coming to an end.

Second, the Fed will reduce their balance sheet. Like, you know how the Fed was printing money into the economy? Well, this is pretty much the opposite of that. See, when they buy a bond, what they're really doing is loaning out money that will eventually have to be paid back. So when the Federal Reserve gets paid back, they pretty much take that money and instead of loaning it out to somebody else again, they just destroy it. And, uh, it's all gone. That's it.

Third, the Fed will raise rates. They do this by influencing what's called the federal funds rate, which is the interest rate that banks charge other banks when they lend each other money. The higher this rate goes, the more influence there is for other rates to go up alongside with it, and voila! We got mortgage rates now at five percent. Finally, fourth, the chance for more interest rate hikes is increasing. As Jamie Dimon of JP Morgan said, the stronger the recovery, the higher the rates that follow. And right now, with record low unemployment and a very strong job market, the chance of a larger rate hike is increasing because the economy should be able to handle it.

Right? Well, all of that happening at the exact same time is leading us to what's known as a new world order within the stock market. And if you're wondering what that is, wonder no longer! Right? As the Fed plans to reduce their balance sheet, BlackRock is telling their investors to prepare for the end of a backdrop of low rates and slow growth that's defined markets since the 2008 great financial crisis. From their perspective, they see a new world order taking shape that will undoubtedly entail higher inflation and rates than we knew from 2008 to 2020, but also a trickier environment for investors.

See, throughout the last two years, growth stocks saw the largest increases, while they were fueled by cheap rates, low inflation, and easy access to money. But now that we've begun to see the tables turning, those exact same stocks have recently fallen from their highs, with some down as much as 75 percent under the new rising interest rate environment. In this case, BlackRock suggests that during times of Fed rate hikes, value stocks have outperformed growth over one, two, and three-year periods, suggesting that investors may begin to prioritize today's fundamentals, profits, and cash flow over the potential of more cash flow in the future.

Bank of America also seconds this and mentioned a few months ago that we're in the early innings of an upcoming value cycle, and that the relative discount for value stocks remains nearly two standard deviations below average, which is another way of saying that tech stocks are too expensive and everything else is trading below what it should be worth. According to them, I also found it very interesting that Goldman Sachs, back in October of 2021, nearly called the top of the market when they said the market is due for a large but temporary rotation out of growth stocks.

According to them, since the great financial crisis of 2008, there have been 15 rotations into cyclicals and out of defensive, safer stocks. On average, these rotations lasted for four months and resulted in a 15% outperformance for cyclical stocks. However, they're still neutral on tech stocks, acknowledging that they're a very big part of our economy and very much here to stay. But basically, in other words, the consensus among analysts is that as interest rates rise, data shows that we're more likely to see a shift into value stocks as investors seek out more stable, predictable returns.

But in terms of the new impact of the market, why information to make money, here’s what you need to know and which stocks have historically performed the best during times like this. Alright, now in terms of the new world order for the stock market, along with the recent increases to interest rates, not everybody believes it's going to be a smooth transition. And as Morgan Stanley warns, the bear market rally is setting the stage for another correction.

As their analyst explains, they're bracing for an S&P 500 decline of at least 13% between now and September, and that after the Russian-Ukraine invasion, things got oversold. For them, they believe that a recession could be the result of an over-aggressive Fed, and in response, they're doubling down on defense, including utilities, consumer staples, and healthcare. Of course, he also acknowledges that there's a chance the Federal Reserve doesn't raise interest rates as much as investors expect, which of course would cause the market to go even higher.

But he's not holding out hope. The Philadelphia Fed President Patrick Harker recently came on record to say that he was acutely concerned about inflation and that rates should be deliberately raised to counteract higher prices. This also mirrored what the Federal Reserve's governor recently said, which was that the central bank needs to act quickly and aggressively to drive down inflation. She also alluded to the fact that interest rates could be increased beyond a quarter of a point, and that, of course, would put even more pressure on the market.

The implication here is that with rising prices and rising inflation, consumers could be forced to limit their spending and cause the economy to slump into a recession by the July through September quarter. On top of that, one former central banker believes that the Fed will have to inflict more losses on stocks and bond investors than it has so far to get inflation under control. However, in terms of using this information to make you money, here's what you came for, because the data behind this is extremely interesting.

One study looked at the historic performance of the S&P 500 after it exits a correction, which is defined as a drop of at least 10% from the peak. In this case, throughout the corrections that did not result in a bear market since 1928, the S&P 500 has seen a median gain of 11.5% a year later and an average gain of nearly 14%, rising nearly 77% of the time. Of course, there is always a chance that we could enter a bear market, which Bank of America previously said was 35% likely to happen, but realistically, Goldman Sachs came on record to say that the most likely scenario was simply a flat market with the S&P 500 closing around 4,700 points by the end of the year.

It's a really weird Catch-22 because the better the economy does, the more pressure there is to raise rates, and that's bad for the market. But the worse the economy does, the less pressure there is to raise rates, and that's good for the market. So it's pretty backwards, right? Anyway, the repercussions of higher interest rates are most obviously noticed in real estate where mortgages have increased to five percent, leading to 40% less mortgage demand and potentially soon softer prices.

Of course, that's not stopping millennial home buyers from rushing into the market because now they make up the largest group of buyers based on a new report in late March. Although in terms of what this means for the future of home prices, rising rates might not be enough to cause prices to fall. On the one hand, higher mortgage rates will absolutely soften the insane price increases that we've seen throughout the last two years, but limited supply along with very strong demand will still keep prices relatively high, even though, of course, the rate of growth might be a bit slower.

Besides mortgages, though, the other repercussions of higher interest rates include higher rates on loans in general—from credit cards, auto loans, personal loans, and student loans—higher interest rates on savings accounts, which for the last two years have paid out next to nothing, and hopefully we might end up seeing slightly lower inflation. Maybe.

So in terms of what you could do about this and where your money might be best positioned, here's what I think. Well, now the consensus is that rates will continue to rise, with most traders believing that we'll see a 50 basis point rate hike in May and June. Bloomberg Opinion noted that if inflation doesn't cool down soon, the Fed will have to resort to measures that shock the market. And in a way, this isn't exactly wrong. I would say the market reacts the most to uncertainty along with the surprise of an unexpected event, of which a sudden move in the Fed would do.

Although even with all of those worries, the data does tell a slightly different story. Schroders found that even though most assets did considerably better during a declining interest rate environment, some, like dividend stocks and real estate, continue to do well even when those interest rates increase. Although it's still important to keep in mind that historically, interest rates have been trending downwards even though we're on our way to go back up. So only time is going to tell just how far we go before eventually things begin to level off.

But in the big picture, the SimplyWise blog found that since 1954, even though the S&P 500 monthly returns are three times lower during a rising interest rate environment, the most likely outcome during an interest rate increase is an S&P 500 that moves plus or minus five percent that following month. That's it. The Financial Samurai blog also found that the S&P 500 has gained on average 20 percent throughout a rising interest rate period since 1971, which can often span over several years.

So overall, their conclusion is that yes, rising interest rates can lead to a rotation away from growth and tech, but other industries, like banking, industrials, and semiconductors tend to outperform as rising rates go together with an improving economy. That's why, to me, I absolutely cannot fathom seeing the types of returns that we've been accustomed to throughout the last two years. But I do think that we might finally be entering a time of normalcy, and now would be the time to continue buying into the markets.

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