The Stock Market Is About To Go Wild | DO THIS NOW

What's Graham up? It's guys you hear.

So today, we will attempt to answer one of the oldest and most elusive questions in the entire universe: why the stock market is about to go absolutely insane throughout these next few months. With some of the biggest changes about to go into effect throughout the entire economy, like in just the last week, it was revealed that the Federal Reserve is preparing to pull the rug on their stock market stimulus, otherwise known as tapering. The housing market could be losing steam as demand begins to slow down. Mortgage rates are beginning to trend back up, right alongside with rents. Kathy Wood defends her belief that the stock market is not in a bubble. And the cherry on top of all of this? But a South Carolina man was recently arrested for trying to steal a horse and hiding it in a bedroom.

So given all of this happening all at the exact same time, we gotta talk about what's going on, what this means for the future about the stock and the real estate market, why these next few months could feel like a roller coaster ride as the stock market tries to price in the chance of everything going wrong. Most importantly, we will talk about what you could do about this to make money. But really quick, if you appreciate a week's worth of information neatly summarized in a video like this, it would mean a lot to me if you tapered that like button for the YouTube algorithm. Best of all, I will make a deal with you: if we could keep the view-to-like ratio of this video above 10, I will intro one of my next videos with whatever the top comment of this video says.

Alright, so first let's talk about the biggest boogeyman for not only the stock market but also the entire economy, and that would be the Federal Reserve tapering. Now, for those unaware, back in March of 2020, when the stock market was plummeting into the abyss of the red, the Federal Reserve stepped in and lowered their benchmark interest rates all the way down to zero percent. But here's the thing: the Federal Reserve doesn't just have the right to say, "Alright guys, today the rates are gonna be, uh, well, zero percent! It's free call! Get your free money! Come on, come on! Just go and get it!"

Instead, though, they can manipulate interest rates by doing something called quantitative easing. See, interest rates are not decided by one single person, but instead the market value of long-term treasuries, which is dictated by the forces of supply and demand. Anytime there's not a lot of demand to go and buy treasuries, then yields go up to entice people to buy them. When that happens, then interest rates increase. That impacts everything from how much you pay on a mortgage to the interest rate in a savings account or how cheap companies could go and borrow money.

So follow along with me here: if the Federal Reserve wants those interest rates to go down, they can make a deal with the treasury to say, "We're just gonna go ahead and, uh, buy all of these treasuries." That's going to go ahead and increase demand and lower the yield. And when those interest rates go down, then the interest rates of everything else will go down alongside with it. So with the stroke of a pen, the Federal Reserve began buying 120 billion dollars a month of both treasuries and mortgage-backed securities to artificially lower interest rates down to the levels that we're seeing today, essentially acting like a stimulus for the stock market.

But there's a problem: as we know, low interest rates risk causing inflation as more money enters the market, driving up prices, asset values increase, and things get even more unaffordable. Now, with inflation coming in higher than expected, with some levels not having been seen in the last 30 years, the Federal Reserve is kind of backed into a corner. On the one hand, they initially told us that they were not planning to reduce their treasury purchases until 2024, but on the other hand, the economy is heating up faster than expected.

Now, they might start tapering by the end of this year, which is a lot sooner than expected. The result is that when that happens, the FED is going to start boosting the markets a little bit less. Treasury yields won't be artificially suppressed as much as they are now. Interest rates are going to be a little more free to move back up, and as a result, borrowing is going to start getting a bit more expensive. That has the potential to cause the markets to drop, and what most people fear is something called the taper tantrum, which last happened back in 2015.

See, after the mortgage crisis of 2009, the Federal Reserve did something similar with the housing market. They were buying mortgage-backed securities in an effort to stimulate the economy and get the housing market back on its feet. But that can't last indefinitely. So in 2013, it was announced that they would begin to think about reducing their stimulus, and with that one little comment, the market went into a full-scale panic. Investors suddenly stopped buying mortgage-backed securities, interest rates spiked out of nowhere, volatility went crazy, emerging market stocks tumbled, and the thought was that this was the beginning of the end.

However, much of that proved to be an overreaction because the FED didn't actually start slowing down their asset purchases when that was announced, and within a short time, afterwards, things were back to normal. But today, it's not exactly so clear. Yes, the markets have trended downwards over the last few days, but it's not as bad as you might expect. That really leaves the possibility of two scenarios: number one is that investors saw what happened back in 2013 and they're not worried, or two, the FED is going to have to move a lot quicker than it did back then, and that has the potential to spook the market in a way that's not exactly priced in yet.

Now, in terms of the facts, the FED is going to be meeting in the third week of September, and they're said to decide how they want to proceed with raising rates. That leaves us with the expectation that interest rates are going to be rising sooner than expected. The effects that this will have throughout the entire markets are not exactly known, and because of that, we could expect a lot more volatility through the rest of the year until a lot of this unfolds.

Now, on top of that, in terms of the stock market, there's another few obstacles that it has to overcome before it starts going back up. The first is the theory that September is generally the worst month for stocks, also known as the September effect. That's because, according to Investopedia, since 1950, the Dow Jones has declined an average of 0.8% in September, and the S&P 500 drops an average of half a percent. And what's even stranger is that this happens even in absence of an election year.

That occurs throughout the worldwide markets as well. In fact, Money Chimp has a stock market calculator which averages the return for each calendar month, and as you can see, September is indeed statistically the worst month on record, with, of course, the best month being behind us in April. Now, some believe this could be attributed to a behavioral change, as investors raise money at the end of the summer and otherwise cash in towards the end of the year. Others say that because mutual funds have a fiscal year that ends in September, many of them sell their losing positions around this time for tax loss harvesting purposes, thereby driving down the market.

At some point, the trading volumes generally decline over the summer as investors go on vacation, take time off, and then exit their positions when they get back. Of course, it's important to mention here that because these are averages, it doesn't always mean the market is going to be dropping every single September. In fact, 45% of the time, the market goes up. But it does point to the concern that overall it could paint a negative picture for investors that is beginning to be priced in from what we're seeing today.

In addition to that, we do have rising cases of the new illness strain, with some rather serious concerns that we might enter a more restrictive phase of shutdowns, especially after an article came out claiming that Pfizer's efficacy is reduced after three months. If that happens, there's the skepticism that company earnings are not going to be as strong and robust as they were from a year ago, and with prices near all-time highs, it's causing a lot of people to wonder how long could this last. That doesn't mean that company earnings are declining, but it does mean that they're rising at a much slower pace.

For example, analyst estimates were typically rising 5% after companies report, but this quarter they're rising 3%, and because of that, there's less forward optimism that's helping the market. In fact, the CNN Fear and Greed Meter has turned towards fears. Investors began selling off. For anyone who loves data, the S&P 500 is trading about 5.4% above its 200-day moving average, signaling that historically investors are putting less money into the markets. Investors are also going slightly heavier into bonds, which have mostly kept pace with stocks throughout the last 20 trading days, while fewer stocks are hitting their all-time highs.

As a result, the senior analyst with Swiss Quote said that the clip between economic indicators and the equity prices is somewhat unreasonable, hinting that there's a potential for a sizable downside correction. But even if we do have a correction, very few people predict it's going to be anywhere near as bad as what we saw in March of 2020, even with the overseas turmoil. But of course, things don't just stop there because now we got to talk about what's happening with the real estate market.

Coming back to the housing market, all of this begins with a recent CNN headline claiming that the U.S housing market could be losing steam. That's because, throughout the last year, real estate prices soared from a lack of inventory, low interest rates, supply chain shortages, and inflation fears that caused people to buy whatever they possibly could. But now, the prices have surpassed all-time high after all-time high, and things are said to be cooling down.

According to the National Association of Home Builders, buyer traffic has fallen to its lowest reading since July of 2020, as some prospective buyers are experiencing sticker shock due to high construction costs. But those construction costs are beginning to come back down. Lumber prices have already fallen 71% from their peak, while Home Depot sales growth slowed to 3% after increasing 30% within the first three months of this year.

Or more simply put, in terms of the entire market, prices have seemed to reach a point where buyers are outpriced and they're sitting on the sidelines, waiting for things to cool down. That could be the point where the housing market begins to normalize as construction costs come down and more inventory comes on the market. But there's one thing that's bound to have an impact on the direction that this goes, and that would be mortgage rates.

With the expectation that the FED is going to soon start raising rates, mortgage rates started climbing back up, and home affordability declined. Now, I'm kind of mixed on this because on the one hand, let's not fool ourselves; interest rates are still incredibly low. Like, had you told me in 2016 that I would be able to get a three percent fixed-rate 30-year mortgage, I would be throwing my money at that. But with the expectation of rates rising along with record high prices, a few things could happen: one, buyers sitting on the sidelines could rush in to buy something and lock in a low rate before those rates start going up; two, buyers could wait for the possibility the prices would soften as interest rates go up and affordability goes down; three, buyers wait for more inventory to come on market with the hopes that that would stabilize values; or four, interest rates go up at the same time that more housing is coming on the market and that causes prices to begin cooling off.

Now, I don't see anything here that would point to a crash, even with the eviction and foreclosure moratoriums expiring. But I also wouldn't be surprised if homes sat on the market a little bit longer, sold for a little less than what they used to, and eventually buyers get the upper edge if interest rates go up. Now, on the downside, mortgage rates would be going up, but in the big picture, they're still incredibly low compared to where they were two years ago.

It also doesn't make it any easier that rents are beginning to increase as well—up 11.4% so far in 2020—and that could soon start enticing some of those renters to begin to enter the housing market as affordability begins to level out. As far as why rents are going up, it's pretty simple: the housing market just took off, rents lagged behind while tenants renegotiated their leases to a lower price at the beginning of the pandemic. But as the cost of labor and materials began going up alongside ownership costs, rents really had nowhere to go but up.

The fact is housing prices can't just rise 21.1% without eventually rents catching up to that, and that's what's beginning to happen now. But according to Kathy Wood, rest assured the market is not shorting her funds, being that the price was bound to go down. Now, historically, Kathy Wood's fund has done exceptionally well throughout 2020, having blown past the S&P 500, but some believe that her stock picks might have been overly rich and driven by the euphoric enthusiasm of retail traders that lately has begun to cool down—down about 26% from February. As a result, Michael Burry believes it'll go down even further, so he shorted it. Kathy Wood was quick to respond; he believes that Michael Burry doesn't understand the innovation space, which is a really polite way of saying he's wrong.

But in Michael Burry's defense, he did short Tesla at the perfect time, right as they reached their peak in December of 2020. In terms of this ARC short position, it's yet to be seen how long he's going to be holding on to it or if this is just a really easy way to get a whole bunch of free mainstream publicity. Now, another thing to also consider is that Scion Asset Management has a portfolio value of over 2 billion dollars, and his short position is limited to, as of right now, 31 million dollars worth of puts.

Now, that might sound like a lot of money, but once you realize that's only one and a half percent of his entire portfolio, it's really a small piece that brings him just as much in free marketing. Even if he's wrong, he could also sell out of these rather quickly, so he could be right for a very short period of time before cashing out with a profit. Now, going back to the overall market here, as far as why Kathy Wood believes that we're not in a bubble, she says it's because too many people are skeptical that it is a bubble.

In fact, she says in the late 90s, her strategies would have been cheered on. You remember the leapfrogging of analysts making estimates one higher than the other? Price targets one higher than the other? We have nothing like that right now. In fact, you see a lot of IPOs coming out and falling to Earth. We couldn't be further away from a bubble. Additionally, the worst news that comes out, the more appropriately stocks are priced, and that gives her better deals to buy.

So in that sense, if enough people believe we're in a bubble, they'll behave under the conditions that will cause it most likely not to be in a bubble. So all in all, there's a lot going on with the market right now, with a dozen moving pieces that are impossible to predict. Even though generally, yes, September has been the worst month for stocks, there are indeed years where the month performs quite well.

So it's up to us to stay the course, understand what's going on, prepare for a lot more volatility through the rest of the year, and understand that everything happening in the market right now is normal, and it's nothing to worry about. For myself, I've continued buying this week, and I've just seen this as a good opportunity to invest at slightly lower prices. And that's it.

But before we wrap this up, here's the news you actually came for about a South Carolina man who was arrested for trying to hide a horse in a bedroom. Apparently, this all started when the police received a call about a man riding a horse down the road. The complainant later told deputies that the suspect was her nephew and they had issues with him in the past stealing things.

So when she saw him riding down the road on a horse and knowing that his family didn't have a horse, she called the police. The horse, named Jubilee, is otherwise fine, and the suspect had prior charges, including throwing a mandolin into a longtime neighbor's pasture. The moral of the story here is don’t steal, and always smash the like button for the YouTube algorithm.

So with that said, you guys, thank you so much for watching. I really appreciate it. As always, make sure to subscribe and hit the notification bell. Also, feel free to add me on Instagram, I post there pretty much daily. So if you want to be a part of it there, feel free to add me there. As my second channel, The Graham Stefan Show, I'm posting there every single day. Don't post 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!