THE FED JUST RESET THE MARKET | Major Changes Explained

What's up guys, it's Graham here and, uh, welp, it just happened. The Federal Reserve completely just shocked the market right now with the 75 basis point rate hike, setting off yet another chain reaction that's about to impact the entire market at the core. These interest rate changes have a significant domino effect throughout everything from housing, stock values, cryptocurrency holdings, savings accounts, auto loans, credit cards, and the list goes on.

That's why it's incredibly important that we cover exactly what they say is going to happen throughout the next year. The biggest change is being made; what this means for you, and most importantly, how you could use this information to make you money. Because I have to say, this is the start of a trajectory that many newer investors have not seen, and it's important to get this out in the open so you know precisely what to expect.

Although before we start, since the Federal Reserve just hiked rates, it would mean a lot to me if you hiked the like button by giving it a gentle tap for the YouTube algorithm. Doing that helps me out tremendously; it makes all the research completely worth it. And as a thank you for doing that, here's a picture of an extremely photogenic baby sea turtle.

Alright, so first, I think it's important that we talk about what the Federal Reserve is actually doing. Because, unlike what most people think, their job is not to protect the price of Nancy Pelosi's stock portfolio, even though inadvertently they do affect the value of our money. Instead, the Federal Reserve is what's known as a central bank, whose role is to oversee our economy, regulate financial institutions, and control the supply of money into and out of the system.

Their priority, over everything else, is to make sure that we have a strong labor market. We maintain maximum levels of employment and in doing so, they could regulate the financial markets in a way that moves us away from record high inflation, especially during a time where food prices, housing, gasoline, energy, automobiles, airfare, commodities, health, discretionary, and medical care costs more. I think I got it all!

And right now, they're doing damage control to prevent us from going into a full-blown recession by raising interest rates and crashing the market. All of this begins with what's called the federal funds rate, which is a really fancy way of saying this is the interest rates that banks could charge other banks anytime they lend each other money.

See, banks are required to have a certain amount of cash within their systems at all times as a reserve. And if they have less money than they need to at the end of the day, they could borrow the difference from another bank and pay them back with interest. Well, the federal funds rate is the guideline as to how much interest banks could charge other banks, which of course eventually makes its way to your portfolio.

Think of it this way: when the federal funds rate increases, financial institutions have to pay more money themselves, and that cost gets passed on to you as the customer. By doing this, the goal is that consumer demand will begin to shrink, growth will begin to slow down, and over time, eventually inflation could get back to its two percent target.

In the short term, their goal is to achieve what's called the neutral interest rate, which is an interest rate that neither sparks nor halts growth; it's just neutral. And to make things even more confusing, the neutral interest rate isn't even known—it's just estimated based on various analysis and observations.

Now, it's assumed to be somewhere between two and a half and 2.75 percent, which means there's a good chance we could get there by the end of the year. But others argue that this assumes that inflation comes down, and if it doesn't, they may need to increase rates even further, with one analysis calling for rates to hit 4.25 percent.

So, in terms of where we are today and how this impacts your investments, here's exactly what they had to say and their warning for things to come. As of today, the FED increased their benchmark interest rates by another 75 basis points. Will they move forward on their path to bring down the highest inflation that we've seen in the last 40 years?

The Federal Reserve is currently scheduled to meet four more times throughout the rest of the year—in July, September, November, and December—meaning we could potentially see more 75 basis point rate hikes, bringing us to a three-and-a-half to four percent federal funds rate by the end of the year. That would put us at a level not last seen since the beginning of 2008, right as the United States entered the Great Recession.

Of course, there are warnings that a recession may just be unavoidable or that they're more likely to risk one for the sake of bringing down inflation. But regardless of what happens, the FED did signal a few forecasts in terms of what they believe is going to happen.

First, whether you believe it or not, they think that inflation has already begun to peak and that prices will begin to cool down throughout 2023 and 2024, eventually returning to their baseline of two percent. Second, they also projected a slowing economy throughout the next two years, with the unemployment rate beginning to slightly increase.

Third, by bringing down demand, we increase our risks of entering a recession. See, their goal on the surface is to raise rates enough to slow down the economy to catch up with supply, and that's already started to happen. Retail sales have been reported as going down right as energy costs have soared, so it's logical to assume that people will begin to cut back.

And fourth, they were quoted as saying that clearly today's 75 basis point rate hike was an incredibly unusual one, and I do not expect moves of this size to be common, which the market loved. However, just remember that a month ago, a 75 basis point rate hike wasn't even considered. Proof that anything could happen and everything should be taken with a grain of salt.

Also, keep in mind that just because the stock market is up in May, the stock market didn't decline until the day after, while everything began a rather quick descent. So, in terms of how that impacts everything from stocks, real estate, cryptocurrency, and the risk of stagflation, here's what you need to know.

First, let's talk about stocks. On the surface, investors are warning that the economy is slowing down. Businesses are cutting back, people are spending less, and as a result, your portfolio drops. Now, it is true that increasing interest rates makes it significantly more expensive to borrow money, and with the Federal Reserve actively removing money from the system through what's known as a balance sheet runoff, it will be more difficult for companies to do as well as they have throughout these last two years.

However, LPL Financial researched market behavior throughout every single rate hike dating all the way back to the 1960s, and they found that in 80 percent, or 10 of 13 prior periods, the S&P 500 posted gains as rates rose. In fact, they reported that the average increase in the index was 6.4 percent, only slightly lower than the historical average of 7.1 percent.

Of course, they do acknowledge that rising rates during periods of high inflation have generally resulted in lower stock returns, and in five of those rising rate periods, the average annual return was just negative 0.4 percent. Of course, we also have the complications of a potential recession, of which has resulted in an average gain of 1.3 percent dating all the way back since World War II.

Yes, we do have instances like 2009 where the market did drop almost 40 percent, and that could absolutely happen again. But by and large, the worst indicator for the market, surprisingly, is just flat-out a bear market. Out of the last 17 bear markets since 1946, the average drop was close to 30 percent, with the most severe having been in 2009 when the S&P 500 was down 56.8 from the peak.

Now, when you combine that with a recession, bear markets tend to do even worse, with an average drop of 34.8 percent. And just for reference, right now, the S&P 500 is down about 20. All of that is to say that generally, stocks can do well when interest rates increase, but the absolute bottom usually occurs when we see complete capitulation throughout investors.

This means that when people stop investing, they start selling off everything that they have, and they think that the entire world is basically doomed. That generally signals the bottom and that things will begin to recover. Beyond that, second, let's talk about real estate. This should probably be its own video in and of itself, but since I want to be as complete as possible in this video, here's what you should know right off the bat.

Just from the announcement of higher inflation, mortgage rates immediately spiked by 30 basis points to nearly six percent, which just for some perspective, back in November, we were at 2.8 percent. As a result of higher interest rates, mortgage applications are down, right as home affordability craters by 29 percent from a year ago. All of this means that housing prices have reached a point where fewer buyers are able to qualify, and as a result of slightly less demand, more inventory builds up, and that means home price growth begins to slow.

Now, in terms of that inventory, parts of the country are seeing an uptick compared to a year ago, with places like California seeing a 15 to 20 percent increase in new listings and buildings on the rise, with new construction seeing the largest surge since the FED attempted to raise rates back in 2018. Now, home prices, on the other hand, are slightly more difficult to predict. That's because housing is very much a lagging indicator, and the data that we have today is often the result of purchases that were started months ago before mortgage rates went up.

The reality is we're probably not going to see the effects of today for another 60 to 90 days, at which point the best that we could do is make an educated guess and then hope we're right. The economist Mark Zandi believes that the housing market is not going to crash like it did back in 2008, but there will be a correction of five to ten percent price reductions in significantly overvalued markets. On the other hand, Bank of America economists warned that low supply will likely drive prices up another 15 percent this year, and the general consensus seems to be that if prices don't fall, they'll at least rise by slightly less.

Which, let's be real, I think that's a good thing. Home price growth has been completely out of touch with reality, and I think it's a healthy sign that things are beginning to cool off. Objectively though, there are a few factual points to keep in mind, like real estate is very much local; not all markets are going to behave the same, and generally rents remain fairly consistent even if the housing market does go down.

That's why I'm using this as an opportunity to find undervalued deals purchased with the intention of long-term cash flow, not this crazy ongoing appreciation. Even though this is probably an eight to ten-year plan, I believe that having consistent income over these next few years is extremely important. And for anybody potentially interested in investing alongside with me in these rental properties, I'll link to some information down below in the description, if of course you're accredited.

Finally, we gotta talk about cryptocurrency. Throughout the last few days, both liquidity and the entire market has plummeted, sparked by fears of Jerome Powell continuing to raise rates and offer better alternatives to investing in a risky asset. Just consider this: if the Federal Reserve keeps raising interest rates to the point where soon a corporate bond pays you a nine percent return, why take the risk of investing in cryptocurrency where you could get an almost guaranteed return without worrying about a rug pull, market manipulation, or excessive leverage?

Unfortunately, what started off as an uncorrelated asset is now closely following the trend to big tech as it rises and falls alongside with the stock market. As a result, CoinTelegraph found that the market is holding on to an average unrealized loss of almost 20 percent. That means that most investors are underwater with their crypto purchases just like with stocks.

Of course, not everything is bad, and one report believes that Bitcoin adoption will hit 10 percent by 2030, while newer network-based technologies continue to be adopted much faster than the market expects. Another investment manager believes that eventually, Bitcoin will go half the market cap of gold or 250,000 of Bitcoin; however, that may take many years.

The way he sees it, the SEC doesn't wish to approve a Bitcoin ETF until they get jurisdiction over the underlying cryptocurrency exchanges, which has to occur via laws. So only time is going to tell how long that takes. As for myself, I currently have less than five percent of my entire portfolio split between a 50/50 mix of Bitcoin and Ethereum, and I see this as a high risk, high reward part of my portfolio.

But for anybody buying in, just expect that you're either gonna make a whole bunch of money or you're gonna lose a lot of money. But no matter what you invest in, just be careful and come up with a game plan ahead of time in case it does the opposite of what you expect it will. Whether or not the pain is behind us is yet to be seen, and it could very well continue to get worse.

But for the time being, the FED is trying to get a real interest rate that's not negative. For example, if rates are five percent and inflation is seven percent, it's still two percent negative. And as you can see, 2020 blew the market completely out of any resemblance of normalcy. Effectively, lenders were issuing money at negative seven percent interest, and they're quickly working on a path to bring that as close to zero as possible.

As far as what you could do about this practically, do your best to pay down any variable interest rate debt. Always get a fixed interest rate so that that way your payment stays exactly the same, and the boring answer is stay the course as usual. Because every piece of data tells us that this is the way to make the most amount of money long term.