It’s Over: Why The Middle Class Is Financially Screwed

What's up guys, it's Graham here. So usually when I see a mistake or something that shouldn't be happening, I like to call it out and share my thoughts because investing is something I take extremely seriously, and today is no exception. During a time where investor sentiment has fallen to extreme fear, it's all but confirmed that we're very likely to head towards a recession. Unfortunately, according to his study, the vast majority of investors are already making a huge mistake and quite literally doing the exact opposite of what they should be if they want to make money.

This comes at the same time that the Fed nears another 50 basis point rate hike in both June and July. Earnings are getting worse, with Morgan Stanley warning of another 10% pullback; and a wild turkey is attacking people in DC while multiple agencies are in pursuit, and one man protected himself with a rolled-up plastic fence. Yes, that is a real story!

Anyway, let's talk about the current state of the market, the impact of a potential recession coming soon, whether or not housing values are falling as fast as Millennials would like, and then finally, we'll address the mistake that the vast majority of investors are currently making without even knowing it. And it's bad.

Although before we start, my current analytics tell me that you have not yet smashed the like button for the YouTube algorithm, and I'd like to change that. So how about this: if you hit the like button or subscribe in the next five seconds, I'll show you this really cute picture of a baby turtle.

All right, so in terms of where we are today, the good news is that we don't have that much bad news—kind of. Even though multiple companies are warning about slowing demand, weak earnings, and less consumer spending. On the bright side, it seems like expectations are already relatively priced in, and we already know what's going to happen.

For example, initially, the first sell-off began when the FED began raising rates, which increased the cost of borrowing and led to a quick sell-off among investors as their consumer demand began to slow down. People cut back, bought less, and held cash because of rising costs, leading to, of course, less profit for businesses and less funds in your brokerage account.

But not all bad news is bad. When the Federal Reserve signaled that they would most likely raise rates by another 50 basis points, the market rallied because, hey, you know what? It could have been worse! At least we know what to expect now.

For those who missed the meeting and want everything summarized in the next 20 seconds, here you go: this is why the stock market reacted so positively in the meeting. They mentioned that all policymakers on the committee supported the 50 basis point move in May, in addition to the plan to begin shrinking the Fed's nine trillion dollar balance sheet beginning in June. This unanimous decision simply manages investor expectations, and as long as nothing unpredictable happens, the market could price it in and then move on.

It's kind of funny, by the way, because earlier this year, the 50 basis point rate hike was seen as a worst-case dangerous scenario, and now it's seen as good news that it's only going to be going up by 50 basis points. So you see what I mean about managing expectations?

Anyway, even though the market's going up, Americans are still worried about the state of the economy. With CNN's index at extreme fear, along with the rising risks of a recession and mass layoffs, there is one aspect that very few people are talking about, and that's the signal that the Federal Reserve could soon be selling off their assets onto the open market.

And that is something that we have to talk about. See, in the beginning of the pandemic, the Federal Reserve took an abrupt action to stop the losses by buying corporate bonds and mortgage-backed securities as a way to ensure that corporations and people who needed money got money. This was how they were able to inject 120 billion dollars a month into the economy, and it's largely agreed that this strategy bolstered the market to the point where businesses could stay afloat, loans were available, and inflation could reach a 40-year high.

Okay, no jokes aside. They did provide a backstop to what could have possibly become the next Great Depression. But beginning in March, they completely cut back on their stimulus, and now they've indicated the possible sell-off of their balance sheet, which could have pretty serious implications throughout the market.

Think of it like this: when things got bad, the FED basically said, "No problem guys, you want a mortgage? Yeah, we'll buy it! Your company needs money? Here's a 10-year loan; go have fun and spend it wisely!" By doing so, they essentially built up a portfolio of their holdings that they could either keep until they're paid back or that they could sell on the open market.

The Federal Reserve president recently said that once their balance sheet reduction is well underway, that is an option that the Federal Open Market Committee could consider. If this happens, mortgage rates will likely begin to increase, loans will be slightly more difficult to come by, and in turn, the Federal Reserve will be removing money out of the market and subsequently reducing inflation and lowering costs.

Obviously, this puts additional stress on the housing market, which is already showing signs of slowing down. But it also signals to investors that maybe right now is not the best time to begin deploying cash. As a result, a new study found that only 18 percent of Americans are planning to boost their stock investments in 2022, with the belief that things are about to get a lot worse.

As we watch all of this unfold right now, I know in the beginning I alluded to a big mistake that the vast majority of investors were making that's nearly guaranteed to lose them money, and this is it. Like I mentioned, Bankrate found that only 18% of investors plan to boost their stock holdings in 2022, and many signaled that they weren't going to be investing anything at all.

In fact, 56% of U.S. investors said that they had purposely not made any moves in response to the market volatility, and nearly 16% said that they had sold stock investments or withheld further contributions in 2022. And this is what we have to talk about.

I recently posted an article by the blog Market Sentiment, which cited research that found that when stocks are down, continuing to buy yields the greatest profits long-term. Generally, the more you try to time your investments, the worse people actually do.

In fact, during a 20-year time frame where REITs, oil, and the S&P 500 averaged almost a 10% return, the retail investor barely managed to outperform inflation at 2.5%. That's because it's largely summarized that retail investors are prone to jumping in at peak hype, selling at the moment they lose money, and then repeating the cycle over and over again while losing a lot of money.

Plus, the data doesn't lie. Since 1930, had you just missed the top 10 best trading days of every decade, your return would be 28% versus 17,715% if you just carried on as usual and didn't sell. Even more gut-wrenching was that Americans in the lowest income category were also the most likely to be active investors due to inflation, either buying, selling, or withholding additional investment due to market volatility.

In other words, the investors who need the money the most are the type to make the biggest mistakes and see the lowest overall return. So as part of my personal finance rant, I just have to say, regardless of what the media says, regardless of how difficult it is to watch your portfolio drop in value, and regardless of what you think will happen, every single study throughout the last 100 years reinforces the fact that buying and holding a well-diversified, low-fee index fund is the best way to make the most amount of money.

Generally, when the markets are down, investing more leads to larger returns. Now obviously this doesn't necessarily apply if you're aggressively out there trying to buy meme stocks and penny stocks that you heard about at the casino, but if you're in a globally diversified, low-fee index fund, then this advice holds extremely true.

When most people are losing money, selling, and panicking, you should do the opposite of that: stick with the plan and buy as usual. This should help you overcome an otherwise very costly mistake and hopefully end up making a lot of money in the process.

Believe it or not, it was also found that 40% of investors who pulled money out of the market in the last year regret it, even when the market is down year over year. So that says a lot—when they sell, the market goes lower, and they still have regrets.

Of course, as far as my overall thoughts in terms of housing, the good news is that even in the wake of rising interest rates, mortgage rates have actually begun to decline as demand slows down, meaning that the housing market could begin to stabilize throughout the rest of the year.

In fact, the chairman of Riverfront Investment Group believes that due to strong supply-demand conditions, we believe most markets are likely to rust than bust. By rust, we mean that nominal prices—not adjusted for inflation—could decline somewhat or stagnate around current levels for several years.

It's also worth noting that pending home sales have plunged to the lowest level in a decade, mainly because higher interest rates don't just affect buyers, but they also affect sellers. After all, if they sell, they have to move somewhere else, too.

It's quoted that the vast majority of homeowners are enjoying huge wealth gains and are not under financial stress as a result of having locked into historically low interest rates. In other words, sellers don't want to give up a fixed rate 2.8% mortgage when a new one would cost them 5%, so they're staying put.

That means yes, we could see some softening, but the chance of a crash seems pretty unlikely with the information that we have available to us today.

Now, cryptocurrency, on the other hand, did see the largest sell-off—down about 40% year-to-date—but JPMorgan believes that this could be a great opportunity for investors, and they say it's actually undervalued by 28%. Although take that with a grain of salt, because a Guggenheim analyst also believes that the bottom could be $8,000.

So basically, everyone is just throwing out a random guess, and eventually, one of them is going to be right. But the one thing that we don't have to guess on is that market volatility is your friend. It's a great opportunity to buy in cheaper, and don't be discouraged if you're in the negative and feel like throwing in the towel.

This is what a realistic and healthy market should be looking like, so embrace it! Dollar-cost average, and over the next few months or even years, the markets will recover, and at that time, you'll be glad that you stayed the course.

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