Why the Stock Market Might Not Crash...

So I like to think I make pretty down-to-earth investing videos. I generally try and avoid speculation, I avoid trendy stocks, I avoid hype, and instead, I just focus on rational thinking and rational investment. That has led, you know, to a fair bit of commentary from myself about how, you know, the market looks very high. Almost nothing is cheap at the moment, you know, how inflation might hit hard and send the stock market down, and so on.

So today I wanted to take the complete opposite starts. You know, I've said my piece on why we may see some sort of market correction at some point in the not-too-distant future, and now I'm going to explain the reasons why that may not happen. So with that said, let's get stuck in and discuss.

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So I think when taking the opposite viewpoint that the markets are fine and, you know, definitely won't crash, there's probably three points we could lean on. The first point I wanted to start with is inflation.

As I've discussed many times on the channel in the past year or so, right now the Federal Reserve is printing a lot of money. They're virtually adding zeros and buying up financial assets to inject money into the system and keep interest rates at practically zero. Now, unfortunately, a consequence of this increased, you know, abundance of money is inflation.

We have seen that, you know, in the past few months. We've seen quite a high inflation rate. We were getting used to inflation being between, you know, one and two percent. Now it's climbed up to 5.4 percent, and people have been worried that this inflation is going to keep climbing. One of the people leading in that opinion has been Michael Burry. Of course, he's been calling out potential hyper-inflation in the United States.

If that were to happen, then the Fed would raise rates, and that would pull the markets back down to earth. However, let's not dismiss the fact that the Chair of the Federal Reserve, Jerome Powell, the guy in charge of pulling the levers, has said many, many times now that the Federal Reserve is of the opinion that this inflation is transitory.

This means they expect inflation to run high for a bit and then just come back down. The reason they believe this will happen is that in the last 18 months or so, we've seen supply chains choked, really choked, due to obviously all the lockdowns. We've seen demand naturally building up; this is naturally an inflationary force.

But now we're seeing the opposite; the supply chain is getting back on track, and lockdowns are becoming less frequent around the world as vaccinations rise. So the Federal Reserve believes that, you know, from here we will see the supply side come back up to meet the demand once again, and thus the inflationary force will diminish.

But how does that mean that we likely won't see a market crash? Well, it's because if the inflation is transitory, the Fed won't be forced to raise interest rates. Raising interest rates is the way to stop inflation, but it also, you know, puts the brakes on the economy. It tightens the money supply; loans are harder to get, and usually, the stock market and the real estate markets come under pressure.

Now, the reason I wanted to make this video now is that we actually just got August inflation data out of the U.S. just the other day. As you saw before, the inflation rate has been climbing; it's climbing up to now around 5.4 percent. Then it seemed to stabilize; it stabilized for a month.

But the question is, well, where to next? This month's inflation number came in, and it shows in the last 12 months we've seen 5.3 percent inflation. Now, technically that is a trend in favor of the transitory inflation argument, but, you know, unfortunately, it certainly isn't definitive.

So we really will have to watch the next few months to see if that downward trend gets stronger. You know, if it does, then the Fed simply won't need to raise rates, and thus the stock market will avoid that pressure. So that's really reason number one why the stock markets may not crash because inflation will come, and nothing will cause the Fed to raise rates.

So in the eyes of the big money managers, stocks are still the place to funnel money instead of bonds, despite being very overvalued. That's actually something that Ray Dalio explained in a recent talk. So I'll play a quick clip here:

So for example, let's say if we were to take the bond yields, um, the bond yields are, um, at extremely low levels. So say think about bonds as having a multiple. The multiples of bonds are, you know, like 75 times earnings or something, depending on what bond market you're operating in.

And so when stocks compete with bonds, they're competing with low, uh, returns. And so, um, it's not unreasonable to think that the stock market could have a multiple of 50 times. If bonds have a 75-time multiple, why can't bonds? And that means a low return.

Now Ray kind of trips over his words a little bit there, but hopefully you can still see his point, that, you know, in ultra-low interest rate environments, to big money managers, stocks still look like a much better place to park money than in bonds. If that remains the case, then the market isn't going to face any real pressure.

So that's the first big point as to why the market may not crash in the next little while. But there is one more really major point, and forgive me for this next section because I've actually said pretty much this exact argument in a prior video. So my apology is for the repetition, but one key reason we may not see a market crash is that the big American companies are not struggling.

In all honesty, a lot of them really didn't even struggle during the lockdown. So let's look at the S&P 500. The top 10 stocks make up 29.79% of that index. Honestly, that is quite remarkable: 490 stocks make up 70%, and then 10 stocks make up 30%.

So the S&P 500 is really, really top-heavy. And in, honestly, the S&P 500 is the index that people turn to when they discuss the American market. So really, the top 10 stocks are going to have a very big say in how the overall market is going. While in the past we’ve been discussing how the market looks expensive and how everything’s overvalued, the reality of the matter is that if these companies keep performing well, they continue to prop up the market.

You know, so how well are these companies doing? Well, I went and I actually listed the top 10 stocks in the S&P 500 and their weight, and then I decided to see how their Q2 net income compared with Q2 last year, 2020. Have a look at this: every single company is doing better now than they were then. A lot of them are doing drastically better. It's really quite incredible.

Even though, despite performing well, they're all still really quite expensive. Usually, it takes some sort of negative catalyst, a negative stimulus, to send a stock sharply in the other direction. And when we forget about the macro and we just look at these individual companies, it doesn't seem like they are going to start struggling anytime soon.

As I said before, most of these stocks didn't even struggle during the height of the lockdown. You know, Apple did well, Microsoft benefited, Amazon really benefited, and Facebook and Google did as well. So when you look at it, even if the other 70% of the S&P 500 isn't doing as well, the fact that these top 10 companies are doing so well is, you know, quite simply, it's more than enough to keep that index going up.

So that's really the second key point as to why the market may not crash in the next little while. Then moving on to the last point that I could think of, this point honestly is much more general, much more broad. The point I thought of is, quite simply, you know, we're not really doing so bad anymore.

I mean, you think about where we were 15 to 18 months ago. We had a rapidly spreading disease; we had no way to cure it. We had to essentially lock the world down; we had to halt all business. The supply chain stopped. You know, at the time we weren't sure what the central banks of the world were going to do, if they were going to step in and how much support they would provide. You know, honestly, that wasn't a great time, and fair enough that the market plummeted.

But now, now we have a way to cure this thing. We have vaccines being produced in high quantities, and the trend certainly is opening up as opposed to closing down. Where we are now versus where we were 18 months ago, honestly, we're doing much better.

Usually, for markets to crash, as I said before, it takes some sort of negative catalyst. Now, not always, but in most instances, it takes some sort of crisis—for example, you know, September 11, or Cuban missile crisis, Pearl Harbor, global financial crisis—those sort of crises. But now it doesn't really look like a crisis anymore.

Now, granted, there's still a long way to go, but the trend is certainly moving in the right direction. So chances are it'll probably take something else to shock the market if the next crash we were to see was going to be triggered in that sort of way.

But overall, that's my kind of opposing viewpoint to the one you normally hear me talk about. I think it's always a good idea in investing to, you know, consider both sides of the argument, kind of battle back and forth. So, you know, definitely let me know where you stand.

Let's say, let's put a parameter in the next two years: do you think it's more likely that we'll see some sort of stock market correction, or do you kind of think the markets will just keep plodding along as they have been? So definitely let me know. I'd be very interested to hear what you guys have to say on this topic. I'm sure we'll get multiple opinions in both kind of camps, so definitely let me know.

And you know, if you like this video, make sure you leave a like on it, subscribe if you haven't done so already, check out the new Money Clips channel if you're interested in even more shorter form content that kind of doesn't make it to the main channel but still content that I want to make. I'll put it up on New Money Clips so you can definitely check that out.

And if you're interested in how I go about my investing, passive or active investing, then check out Profitful. I've made two courses over there on investing. We've also got courses on tax as well if you're interested in learning about how you are taxed with your investments; that's for Australians. But in any case, check out Profitful if you're interested.

But I'm starting to ramble, so thanks very much, guys, for watching, and I'll see you guys in the next video.

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