The Stock Market Is ABOUT TO BOTTOM

What's up, Grandma's guys?

Here, so it's official: the market makes absolutely no sense. Tesla beat earnings, and as a result, they drop. The US GDP topped expectations, and shortly after, the entire market falls. Even gold, which typically does well in times like this, is going down alongside everything else. It's almost as though up is now down, left is now right, and the only people making money are selling NFTs.

So, that lends the question: with the stock market trading sideways and acting unpredictably, are we closing in on the stock market bottom, or is the market about to drop again now that the Federal Reserve is planning to raise interest rates in less than 60 days? To figure this out, I'm going to dust off my crystal ball, and we're going to talk about all the reasons why the stock market should, in theory, continue going down. Then we'll address the counterarguments as to why the stock market should, in theory, begin to go back up.

And listen, I'll tell you up front: I'm not going to lie to you and pretend like I know what's going to happen or be like Jim Cramer, who tweets "buy Netflix" right before it has its worst day in a decade. Instead, I'm going to give you the full spectrum of both sides of each argument, tell you what I think, and then I'll let you come to your own conclusion.

There's a quick backstory. I think it goes without saying that we've seen a pretty turbulent time throughout these last two months. Like in December of 2021, the market hit all-time highs, and then the S&P 500 began falling to its worst January ever in history, with a drop of nearly 10 percent. That would officially mark a stock market correction. This comes at the same time that our economy grows beyond our wildest expectations; unemployment is at the lowest level in decades.

And here's the kicker: low interest rates are beginning to come to an end. For those who didn't have a chance to watch or listen to the most recent two-hour-long Federal Reserve meeting, not to worry—I got you covered with the 24-second long summary that explains everything you need to know because this partially explains why red is the new green.

One, the Fed is planning to end their bond and mortgage buying program in March 2022, thereby injecting less money into the economy. Two, beginning in March, the Fed is planning on an interest rate hike of at least a quarter of a percent, but it could be as high as a half a percent— all because of three: inflation. They were quoted as saying that December's inflation is about the same or worse, meaning if it's much higher than seven percent, they're gonna have to resort to extremes to bring that back down.

But where most people want to focus right now is the stock market, which makes sense because watching these markets is like watching a game of ping pong back and forth—where one hour it's up, then another hour it's down, and now it's back up. But by the time I post this video, it's down again. This leads a lot of people to wonder how long this is going to go on for, and did we potentially just see the bottom?

So here are some of the reasons why it might continue to go down. First, we have high inflation. The issue we have today is that supply chain bottlenecks lead to less inventory, which leads to higher prices, which gets passed on to the customer, who now needs to make more to pay for those higher prices. This means even higher costs need to be factored in, restarting the process all over again. That, of course, leads to more action from the Federal Reserve, whose job it is to prevent our economy from turning into Zimbabwe.

But there's also another side effect of inflation, and that's the fact that as prices go up, consumer purchasing power goes down, and therefore they buy less. That leads many people to believe that inflation, on its own, is enough to cause the stock market to continue falling.

In terms of history, as you can see right here, we have absolutely no idea what we're looking at. No, seriously, from all the data that I could find, there is no direct affiliation between inflation and stock market performance. However, higher inflation does lead us into number two, and that would be higher interest rates.

Unfortunately, the Federal Reserve does not care that your Tesla call options are 30 in the red, and since their main concern is maximum employment and two percent inflation, they'll need to raise rates at some point to curb demand, and as a result, the stock market falls. Why, you ask? Or I guess, why do I ask?

Well, think of it this way: when interest rates are zero and inflation is high, the only place that people could get a meaningful return on their money is by investing it in either real estate or stocks. But when interest rates rise, and all of a sudden investors have the option to earn two percent in a savings account, three percent in a treasury bill, or five percent in a low-risk bond, there's less of a need to invest in companies that value themselves on their future growth potential, and as a result, the prices on those growth stocks tend to fall.

In fact, as we can see over time, as rates rise, a large portion of the market begins to sell off, and with tech stocks having seen a meteoric rise from a worldwide shutdown, they tend to suffer the faster rates increase.

Third, we've got slowing demand and growth. The fact is, during a shutdown where people had a lot of time to stay indoors and use technology, those numbers soared. Netflix saw record signups; Apple saw surge in phone sales; Zoom's on unprecedented increase. But is that actually sustainable? The outlook now is that most likely it's not. Apple recently said that their demand is slowing down, along with Netflix and Peloton, which doesn't need an introduction, and globally demand is expected to be much less than it was previously.

All of that is just a fancy way of saying we're unlikely to see that explosive type of growth in the future absent of a worldwide pandemic. When you compare the returns of today with one to two years ago, you might be disappointed to see they're less grand than they have been.

Fourth, we have a mixture of record-high consumer debt, record-high housing prices, a pre-pandemic savings rate, and a bleak forecast throughout the next year that continues to bring prices down. I think the sentiment seems to be that people have already invested what they could into the markets; they've already bought all of their subscriptions; they've made all of their discretionary purchases. So what's left to look forward to?

However, that is only half the story, and it wouldn't be fair enough to share the counterarguments to all of this and why maybe we're at a stock market bottom and things could begin to go up.

All right, so in terms of the good news to counteract the previous claims, here are some reasons why the stock market could actually be at a bottom and, dare I say it, start to recover.

Number one is slowing inflation. See, what many people forget is that in order to see sustained inflation, those increases need to be the same each and every year, which realistically is not going to happen. Just consider this: if prices increase from a dollar to a dollar and six cents, that's six percent inflation. In order for us to see extreme inflation continue, that dollar and six-cent item would have to increase to a dollar twelve in the second year, a dollar nineteen in the third year, a dollar twenty-six in the fourth year, and so on.

If something like a six percent inflation rate is going to be persistent, we could all admit that the Federal Reserve is not exactly the most reliable, but even they think that inflation will begin to slow down throughout the next year, and they hope to see 2.3 percent inflation in 2023 and finally back down to 2.1 percent inflation in 2024.

As far as whether or not that actually happens is anybody's guess, but expecting to see inflation like this consistently is still rather unlikely. On top of that, the Wealth of Common Sense blog broke down the years of highest inflation since 1940, and they found that during the years of highest inflation, stocks actually wound up increasing by an average of 9.4 percent.

Two, raising interest rates might not be so terrible. Yes, it is true that rising rates tend to suppress stock values, but that's not necessarily the case for the entire market. In fact, historically, as you can see, higher rates are correlated to higher prices for banks, energy, the automotive industry, and transportation.

In addition to that, since 1994, it was found that the first interest rate hike led stocks to increase an average of 7.3 percent in the following 12 months. JP Morgan pointed out that from February 2009 on, the S&P 500 and 10-year treasury moved together until the 10-year rises to three and a half, when the two diverged. The reason for this is that generally, rates are only increased during a healthy growing economy that could handle a rate hike. So, in a way, the stock market would benefit from that type of optimism.

Three, potentially small-cap stocks could predict the market bottom. As of today, the Russell 2000, which encompasses 2,000 small-cap stocks throughout the U.S., entered a bear market, down more than 20 percent from its recent peak in November, with the average small cap down 40 percent. In this case, some believe that small-cap stocks are kind of like the canary in the coal mine. They typically move ahead of the index, while other larger companies tend to eventually follow. Throughout the last five days, the price has relatively bottomed, returning back to its average P/E ratio, suggesting that we could soon see a floor throughout the rest of the markets as everything else catches up.

Four, most of the bad news can actually already be priced in. I think most investors have already accepted that we could see four or more rate hikes in 2022. We already know inflation is really high; we can already expect that consumer demand is going to slow down, so none of this should come as a surprise. As Business Insider quoted, we'll know when we hit a bottom when seller exhaustion kicks in and stocks stop going down on bad news because there's no one left to sell them.

It's still very much unclear whether or not that point has actually come, but with a lot of pessimism in the market, more of it might be priced in than we think.

And fifth, because there's a lot of people thinking that things are going to get worse, I tend to anecdotally believe that the more people believe it, the less likely it is to happen. That's because if everybody believes the market is going to behave in a certain way, they're all going to take the precautions ahead of time that would prevent that from happening.

It's like if I told you you were 100% not going to smash the like button for the YouTube algorithm. Even if I say this, you're still not going to do it. Well, guess what? Now that you know you're not going to do it, you could go ahead and do it and then prove me wrong!

Anyway, in this case, if people have the expectation that the market is going to continue falling, they're not going to sell off anything they wouldn't have already sold off, and that, of course, gives the markets room to go back on up.

So here's what I think: short-term betting either way is going to be the equivalent of flipping heads or tails. No one knows the full scale of what's to come, if it's better than we expect or if it's worse than we expect. I'm sure half the people out there making these predictions are going to come forward and say, "I was right!" even though the market just so happened to have worked in their favor.

That's not to say that we can't take economic data, analyze it, and then come to a reasonable conclusion. But at the end of the day, we have no idea how the markets are going to react or if things might begin to go back up. But also, let's be real: if you own stocks right now and you don't plan to do anything with them for another decade or two, then why would another 20% drop even matter?

You should see this as a Black Friday sale to be able to continue to buy everything at a discount. If anything, it works in your favor because you're able to earn more money to buy in at lower prices. It's like if I see a sale at the grocery store on their eggs; it's not like I'm going to think to myself, "Oh crap! I've overpaid for my eggs; I should have waited to buy them this week when they were 20% cheaper."

Oh no! I better get rid of the eggs I have right now! No! If I see that, I just think, "Oh great! I could buy more eggs now, and I'm getting a discount on something I would have bought anyway."

But when it comes to it, investments are the exact same thing. That's why I've never understood why people panic so much in the markets or they think it's going to be this apocalyptic scenario that we could never recover from. History has shown us time and time again that's not going to happen.

Instead, I would focus on the things you directly control and ignore the things you can't. Here's what you cannot control: what the stock market does tomorrow, how long things will last, when the bottom of the market will be, what will happen to the US economy, and whether or not I ask you to subscribe if you haven't done that already.

On the other hand, though, here are the things that you can control: whether or not you choose to subscribe, whether or not you cut back on unnecessary spending, whether or not you live below your means, whether or not you invest consistently long-term, whether or not you pay down any high-interest rate debt you have, whether or not you have a six-month emergency fund, whether or not you're over-leveraged with your investments.

By focusing on what you can control and disregarding everything else that you can't, you give yourself much greater power to take advantage of these opportunities long-term without concerning yourself about whether or not the markets will go up or down in the short term. Or whether or not you're already subscribed.

I'm going to ask one more time: if you haven't already subscribed, you may as well do that because it's free.

So thank you guys so much for watching! Also, feel free to add me on Instagram and my second channel, The Graham Staffing Show. I post there every single day I'm not posting here, so if you want to see a brand new video from me every single day, make sure to add yourself to that.

Thank you so much for watching, and until next time!