Don’t Buy The Dip | The Stock Market Is Broken

What's up guys, it's Graham here. So today, let's try to answer one of the most puzzling questions of the market that some people spend their entire lives trying to decipher, and that would be: why did the market just go up? Is this the feared dead cat bounce before another crash, as Wells Fargo warns not to buy the dip? Or did we already miss the bottom before going back to a new normal?

Well, to answer that, I'll get out my crystal ball. No, just kidding! Instead of making random predictions based on absolutely nothing, I decided to pull every single piece of market research that I could find throughout every single geopolitical event since the late 1800s to see what’s happened in the past and hopefully that could help give us some guidance moving forward. Because the more I looked into the statistics behind what's going on, the more it begins to make sense why the market is about to do the opposite of what you think it's going to do.

Even with oil above a hundred dollars, inflation feared to be above 10 percent, home prices continuing to rise at the fastest level ever, and this cat who was just reunited with their owners across the country after missing for seven years! But before we start, it's just like the cat; it would mean a lot to me if you reunited the like button for the YouTube algorithm by giving it a gentle tap.

Alright, so first, let me just say this: it is an extremely difficult time for not only the economy but also the entire world. The crisis between Russia and Ukraine is a really difficult one to watch and read about. As much as I try to stick with the factual data with regards to investing because this is a personal finance channel, my heart goes out to everybody affected, and it's not something to be taken lightly.

So, to bring everyone up to speed who's not familiar with the background of what's going on, here's what you need to know. In my attempt to summarize a very nuanced and complicated situation over the next 90 seconds: to start, it's important to realize that what we're seeing today is the result of a very long-standing tension between Russia and Ukraine that began as early as 1991, after the fall of the communist-run Soviet Union.

At that time, Ukraine had the third-largest atomic arsenal in the world, and because of their close proximity with Russia, they worked closely with each other to denuclearize in exchange for the security that they would be protected from a Russian attack. However, in 2013, the president of Ukraine abruptly rejected a deal that would integrate their economy with the European Union under the suspected pressure of signing a deal with Russia instead.

Although that proved unpopular for Ukrainian citizens, who began to protest their opposition for the failed deal, that worried Russia that their neighbor Ukraine could be adopting new Western alliances. So, Russian troops took over a neighboring peninsula, sparking tension as they had violated their previous agreement not to attack.

In this case, as for the why now, it appears as though Russia wants to gain further influence in the region given its position along the coast of the Black Sea. If Ukraine were to further separate themselves politically, Russia's entire border would be controlled by an alliance who they see as a potential threat. Keep in mind, this is a very, very, very surface level depiction of what's going on, and there are plenty of other resources that I'll link to down below in the description with more information about what's going on.

But as a result of the current invasion, a multitude of sanctions were imposed on Russia, including cutting off funding for U.S. own debt, freezing assets within banks, halting certification of a natural gas pipeline, prohibiting the export of goods, enacting a travel ban, and potentially disconnecting from SWIFT, which processes payments around the world.

All of this is done in an effort to push Russia to halt their advance and work towards a peaceful resolution. But in terms of the market impact throughout our economy, here's what we need to talk about. First, commodity prices like oil, gas, and raw material have skyrocketed in price but are also coming back down.

Oil prices, for example, reached a high of 105 dollars a barrel, as CNBC warns that prices could move to 130 dollars in June if the current tension disrupts the production of crude oil. As a result, the U.S. released nearly 50 million barrels of oil through what's called the Strategic Petroleum Reserve, which holds nearly 600 million barrels of oil, enough to replace about half a year’s worth of U.S. imports.

The goal is that by using these reserves, we could better stabilize the price of oil in the short term, much like an emergency fund that people can draw from instead of selling their investments. This is especially important because it's said that the U.S. consumer drives about 70 percent of the U.S. economy, and if prices rise, that increases the cost of everything from shipping, transportation, travel, consumer items, and pretty much anything else that we use on a daily basis.

However, some analysts also warn that commodity prices are inflated by as much as 40 percent and could fall a long way if and when concerns ease about the Russian invasion of Ukraine. They explained that because of market uncertainty, commodity prices are rising, not because they necessarily cost more today, but instead out of an abundance of caution. So that poses the risk that if things resolve, prices could just as quickly come back down.

Second, as a result of the rising prices, the market has readjusted and lowered their expectation of an upcoming rate hike, causing, in a sense, the market to go back up. If that sounds confusing, just consider this: the Federal Reserve is actively planning for a rate hike on March 16th in an effort to slow down inflation. For them, the faster prices go up, the more pressure they have to raise rates faster than expected, and as a result, the market falls.

But with the threat of an economic global slowdown, analysts now say that the Fed will need to readjust and take it slower during times of uncertainty. The worry is that by raising rates too soon, they could shock the market and potentially increase economic instability. But historically, it is worth mentioning that the market tends to underestimate the size and frequency of previous rate hikes.

As you could see from this graph here, in both 1999, 2004, 2015, and 2018, the Fed increased rates beyond what the market predicted. However, they also acknowledge that markets have been more sensitive to rate hikes than they have in the past, which means they might have to take a more conscious approach, causing the market to go up.

This is also the reason why mortgage rates have begun to decrease for the first time in four weeks while home prices continue rising to another 15.4 percent year over year. But I'll save that one for another video.

And third, before we talk about why Wells Fargo is warning not to buy the dip, we have to talk about cryptocurrency and a quick twist of events. Bitcoin fell below 35,000 under mass liquidations at the start of the invasion, but just as quickly as it fell, it began to recover and is now holding about 38,000 dollars. Some say that this was caused by an unwinding of short positions causing more buying demand and pushing the price higher.

Finally, we have to address the elephant in the room: Wells Fargo's warning not to buy the dip. I did the research to find out whether or not this has been historically true. Now, on the surface, the Wells Fargo head of Global Market Strategy explained that it's just a time to be patient as there's too much uncertainty. On top of that, the more immediate worry for investors is what will happen with inflation, especially through potential disruptions to the balance of supply and demand in energy, aluminum, nickel, and fertilizer, with inflation running at seven and a half percent year over year.

That spillover is the main concern for investors. But is the statement actually true? According to the data, we'll start with an analysis posted by Morningstar two years ago, who looked at every single Black Swan event and war since the late 1800s. What they found was quite surprising: they measured the market in relation to what they call the pain index, which graphs the severity of each market crash as compared to the Great Depression.

They concluded that even though there are extended times of a flat market during extreme uncertainty, the best thing to do is to stay patient because the market has always eventually recovered, and then some. Seeking Alpha also analyzed the impact of war on the markets, and shockingly, the majority of losses occurred just before the outbreak of a war, right when uncertainty was at its highest.

Fund Strat’s Tom Lee also seconds this, citing that the initial drop can often be the lowest point of entry and that U.S. companies have little exposure to Russia, and that falls in stock prices are due to fear and uncertainty rather than any fundamental impact on earnings from the situation. On top of that, CNBC pointed out just how common corrections are, with 26 of them happening since World War II, with an average drop of 13.7 percent over four months, which is about what we've already seen.

The S&P 500, for example, was down about 12 percent at its lowest point year to date, and the NASDAQ was down as much as 14 percent. Not to mention what I actually found most unusual is that during times of war, the market sees an average return of 11 to 14 percent, with an average inflation of four and a half percent.

This is largely attributed to the fact that once a war breaks out, uncertainty is removed, and the market can begin looking forward. At this point, from the stock market perspective, even bad news is better than the unknown, and that tends to push prices higher, like what we're seeing today.

So all of this is to say, from a stock market perspective, it's always a good idea to keep buying in normally, and understand that even though the stock market isn't always rational, uncertainty often leads to lower prices only because we don't know what's going to happen.

That's why I believe Wells Fargo calling out a warning not to buy the dip is largely an irresponsible message to the majority of investors who cannot accurately and consistently time the market, and it pulls at people's fears to think that they might need an actively managed fund, even though they typically underperform even the most basic dollar cost average strategy into the most simple index fund.

That's why I believe that it's probably best just to keep buying the dip, but also recognize that things could very quickly end up getting worse. No one knows how long it'll last or how severe this is going to be, and ultimately, anything can happen.

So my philosophy is always expect the best, prepare for the worst. Inch. No matter what. Subscribe if you haven't done that already.

So with that said, you guys, thank you so much for watching. Also, feel free to add me on Instagram or my second channel, The Graham Stephan Show. I post there every single day—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!