Why Isn't the Stock Market Crashing?

Hey guys, welcome back to the channel! In this video, we're going to be talking about, we're going to be trying to answer the question: why isn't the stock market crashing now? For this video, we are going to look over in America. We're going to be focusing in on America, the S&P 500, and the situation they've got over there because it doesn't really make sense, right? The economy is just down the toilet, yet stocks are at some of them all-time highs. It's just crazy.

I mean, you look at the stock market—definitely, it was crashing in January, February, and March. But ever since March the 23rd, that was the magic date. Ever since then, it's just been a complete change of tune, and the market's just been an absolute tear despite unemployment in America being above 10 right now, despite the economy just absolutely suffering, being decimated at the moment.

So, in this video, I'm going to be talking about the three main factors that I think are preventing stocks from crashing at this current point in time, so let's get into it.

Now, the first factor I wanted to talk about, and this is by far the most obvious factor why stocks aren't crashing right now, is because in America, there's this little thing called the Federal Reserve, which is the United States central bank. Now, when it comes to a country's economic control, it rests between the central government and the central bank. The government collects tax money and does its spending on health and education and security and roads, and blah blah blah, and then you've got the central bank, which controls the amount of money and credit that is in that economy.

It does this by influencing interest rates and printing money. Now, in times of economic recession, in bad economic times, lending tightens up, spending tightens up, and the economy kind of grinds to a halt. Okay, so what the central bank does is it wants to try and stimulate the economy. The way it does that is by lowering interest rates, and the way it actually does this is by buying the debt of the government. So, it buys bonds, and what this does is it means that borrowing money becomes cheaper for businesses, for people.

It also means that if you keep your savings tucked away in a bank, then you're not getting a very good return on that, so it encourages people to borrow money and spend it. Okay, and by doing that, spending obviously increases and that keeps the economy chugging along. Now, through February and the first part of March, the stock market was definitely crashing, but it's very interesting—there's almost like this definite turning point on the 23rd of March where things just completely reversed, and the stock market just won an absolute tear. So what happened on the 23rd of March?

Well, on that date, the Federal Reserve came out with a report saying that they were actually going to start buying the government's debt in the amounts needed to support smooth market functioning. So, the week before, they said that they'd only do this to the tune of 750 billion dollars, and then the week later they came out and said, actually, we're going to just say unlimited. They also announced lots of other initiatives at the same time, including buying corporate bonds, and obviously these initiatives were very much targeted at helping businesses get through the shutdown completely unscathed.

The Federal Reserve was going to create an environment where businesses really couldn't fail, and the thing is, the Federal Reserve actually has a fair amount of control over what happens in the economy. So when they actually came out and said this, obviously that renewed a lot of investors' optimism, and ever since that point, even like Jerome Powell, the Chair of the Federal Reserve, has continued to say in interviews and whatever that we will continue helping us all get through.

By taking kind of this level of action, then they do effectively achieve the goals that the Federal Reserve has, which is to keep unemployment as low as possible, control inflation, and ensure the stability of the American financial system. So, ever since that point in time in March, the Federal Reserve has continued to show support. For instance, the U.S. interest rates still stay at zero. There are various initiatives to help businesses get through that are still being implemented right now over in America.

So overall, they have essentially created an environment where it's very hard for big businesses to fail, which would bring down the stock market quite heavily. So that's really the first reason as to why the market, or the stock market in particular, isn't crashing.

Let's now move on to the second reason. Well, the second reason is, of course, political factors. Now, I don't try and get very political here on the channel. I'm not trying to swing an opinion one way or another, but the reality of this situation is that around the world, what we've typically seen with the shutdown is that as cases of the illness rise, okay, as infection rates are on the rise in a country, then businesses get closed down, right? Restrictions are more heavily imposed on people or on businesses.

Now, you're in this odd situation in America where even though infection rates are on the rise, their strategy is to just open everything back up. So, they're not really focusing on trying to control the spread of infection—they're just trying to get everything open again. Well, the U.S. opened up while infection rates were still going up. You know, the U.S. sadly is not taking this seriously. You know, thank goodness that we have the innovation coming because otherwise the eventual damage would go on for over five years.

So, the reality of the situation over in America is, despite what's happening with the illness, their focus is just opening things back up. Now, what happens when you start opening things back up is that, you know, people's daily lives kind of resume back to normal.

People get back to work. Businesses start producing more goods and services. You know, the demand for goods and services picks back up. Everything slowly gets back to normal, and what this means is that of course business profits start to return back to normal as well. So, in this situation, it's less likely for you to get a stock crash just because actually things are returning back to normal, right? So, there's no real reason why the stocks should crash because they're actually doing not too bad.

And speaking of doing not too bad, that brings me to the third reason why the stock market isn't crashing, at least in my opinion, and that's if it's really because the major indices over in America are being held up by surprisingly good performance out of some of America’s largest companies. So, if we look at the S&P 500, which is just the 500 largest U.S. companies grouped together in an index—well, if we actually have a look at what's inside the S&P 500 and the weighting of the S&P 500, actually a fair amount of that index is just a result of the top 10 stocks in that index.

So, if we have a look at even stats from mid-July, then Microsoft made up 6 percent of the index, Apple made up 5.8 percent, Amazon 4.5, Google—that's both A shares and C shares—made up 3.3, Facebook 2.1, Johnson and Johnson 1.5, Berkshire Hathaway 1.4, Visa 1.3, Proctor and Gamble 1.2—they're the top 10.

Now, what's very interesting is that if you take this top 10, then you look at their revenue for Q2, the quarter that's just ended, and you compare it to the Q2 of 2019, back pre-shutdown conditions, actually a lot of those companies have performed better in this Q2 than last Q2. Have a look at this: you can see that, for instance, Microsoft revenue up 13, Apple up 11, Amazon up 40, Google was flat, Facebook was up 11.

So, despite the terrible kind of economic climate that we're currently in, a lot of these big companies that do hold a decent weight in that index have actually performed really well. In fact, those top 10 stocks account for over 25 percent of the S&P 500—25 percent of the weight of the S&P 500. So, when we're saying, "Why aren't stocks crashing?" Well, if you look at that major index, the S&P 500, 25 percent of that index is actually performing pretty well.

So, even if the other 75 was performing pretty poorly, you could literally have this whole index effectively supported, held up by just these top 10 stocks or top 7 that are still reporting positive earnings. So when you ask, "Why aren't these stocks crashing?" Well, in a lot of cases, especially the biggest companies in America, the reasoning is, well they shouldn't be crashing—they're performing well. Even though the economic climate is terrible, a lot of these companies are performing really well. Thus, why would you expect their stocks to go down? It doesn't really make sense.

So overall, there are three factors as to why I think the stock market over in America isn't crashing. Number one, it's definitely the Federal Reserve, which is coming to the rescue. Number two, you've definitely got those political factors that are enabling business to get back to what it was before the shutdown. And then third and finally, you've got actually a lot of these big, big businesses that have a lot of the weight of the American market—well, they're actually performing pretty well.

So, the last thing to talk about is, well, how does all these factors influence our own investing? And of course, if you are someone that follows that Warren Buffett long-term, case-by-case, company-by-company, long-term value investing strategy, then this doesn't really affect your strategy at all. Nothing that is going on really affects the way that you go about your investing.

So at the end of the day, we just look for companies we understand that are in our circle of competence, that have, you know, a good future ahead of them, and we make sure that we can only buy them when they're at a discount to intrinsic value, when they're at that margin of safety price. Now, one thing that is going to happen is it's going to be much harder to find those businesses at those margin of safety prices because stocks are so high, but that shouldn't actually change the way we go about our investing.

We should always stay true to our value investing strategy of finding those high-quality businesses and only buying them at marginal safety prices. Remember, we just need patience. So much of long-term investing success is just patience—okay? Just not caving to pressure, not experiencing that fear of missing out, just staying ultra-focused on what you can control, staying ultra-focused on studying those companies that mean something to you, that you can understand, that have those competitive advantages.

Just find a lot of those and just wait for events to happen that bring those companies down to their margin of safety prices. So anyway, guys, that will do me for the video. I hope you enjoyed it. Of course, leave a like on the video if you found it useful or if you did enjoy it. I super appreciate it; it helps out the video a ton, so I definitely, definitely appreciate that.

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But that will do me for today, guys. If you'd like to learn more about my investing strategy in a step-by-step walkthrough, then check out the links down in the description. That will take you over to Profit4. I've made two courses about it. But that's it from me for today, guys. Thank you very much for watching, and I'll see you all in the next video.