My Thoughts On The Stock Market Collapse

What's up you guys? It's Graham here. So, we gotta sit down for this one, even though I'm always sitting down, because we're beginning to see some major changes taking place in the market. If you've opened up your computer and taken all through any amount of news whatsoever, chances are you've come across one of these:

The Dow drops 800 points on pace for its worst day since early September. S & P 500 heads for its biggest decline in a month. It's been years since investors have been this fearful of the stock market crash, Nobel-winning economist warns.

And on top of all of that, mortgage rates just hit another record low, while interest rates have finally started going back up. That's right, guys, you heard that correctly: interest rates could soon be going back up. That's a move we have not seen in a very, very long time; and by that, I mean a year.

Now, I know this one sounds like a lot to cover, but I’ll quickly go through everything and break down exactly what it means. Then we're going to be looking through these statistics to see what’s happened in the past and what this means for us in the future.

But really quick, if you guys enjoy this type of content, I got a deal to make with you. If you smash the like button for the YouTube algorithm, I will show you a really cute picture of a turtle. I think that sounds like a fair trade: one like on the video for one cute picture of a turtle. I'm waiting.

Okay, thanks so much for smashing the like button. It really means a lot, and I'm gonna hold up my end of the bargain. Here's a really cute picture of a turtle. Enjoy! And also, quick thank you to Morning Brew for sponsoring this video, but more on that later.

All right, so first things first. Here’s a bit of a background on what's going on. In March, the stock market and the entire economy halted to a standstill as businesses were shut down and stay-at-home orders were put in effect, and tens of millions of people were displaced from their work.

So, in an effort to help ease the concerns of the economy, the Federal Reserve lowered their benchmark interest rates all the way down to zero percent. That would incentivize more spending and more money to be circulated throughout the markets. And at the same time, a multi-trillion dollar stimulus package was passed to temporarily hold us over. That's when the stock market did something that very few of us expected: it started going up and up and up and up to the point where just months after the shutdown, tech stocks reached all-time highs driven mostly by the new work-from-home movement and heavy demand for online products and services.

Of course, there’s also been some minor bumps along the way, but now we're quickly approaching the most anticipated event of the entire year: elections. And from that, we're going to see a lot of volatility that we need to talk about.

Now to start things off with some of the most intense news: first, we have a dire warning from one of the most respected economists in the entire world, Robert Schiller.

Now here's the thing: most of the time, I’m very skeptical of these so-called economists because what they tend to do is make these market predictions each and every year. Then eventually, after 10 years of being wrong, they're right one year. And then that one year they’re right, they say, "Hey, told you guys so! I knew it, I'm a genius!" And then they get a book deal.

It's really no different from flipping a coin and calling heads until eventually it's a heads, and then you say you knew it was going to happen because of some obscure Pythagorean logarithm that you discovered while hiking the Swiss Alps on sleep deprivation, and because of that, you're an expert.

No, but I say that because Robert Schiller is not in that category. He’s developed many measures of our economy that we constantly use day-to-day when analyzing trends. And now he's got a warning for all of us as investors. Robert says that the crisis in the upcoming election has driven investor fears of a major stock market crash to the highest level in many years.

Yet, while investor confidence in the market is low, stock prices are trading at very high levels. Now, in terms of how he gets this information, it's actually quite interesting. He samples random high net worth individuals and he asks them if they think a major stock market crash is less than 10 percent likely to happen.

And in September, 70 percent of respondents felt like the chance of a market crash was more than 10 percent likely to happen, a number which indicates that the majority of people right now are worried about the market. And then that worry could translate into lower stock prices.

Now, on top of that, Robert Schiller also has what's known as a valuation index that surveys the same people and asks them if they feel like the market is overvalued, undervalued, or just the right price. And of course, as we could see from the chart, only 37 percent of individuals feel like the market is undervalued. That means that according to this and Robert Schiller, most investors feel like the market is more than 10 percent likely to crash during a time where 63 percent of investors feel like the market is overvalued.

Now, this isn’t exactly rocket science, and they don’t make any predictions either, but it does give us a gauge on market sentiment which could have an indirect impact on where the market is headed over the next few months.

Now, Robert Schiller does say that the volatile combination does not mean a crash will occur, but it suggests that the risk of one is relatively high. This is a time to be careful.

Now, keep in mind though that sometimes charts like this could be self-fulfilling in the sense that if enough people think something is going to happen, they can act in such a way to then make it happen. But more often than not, this is really just a data point to be made aware of so that you could prepare for a potentially good buying opportunity in the future.

And also, logically, you could better prepare and diversify so that if something does happen, you're not going to be losing your Tesla call options.

Now, in addition to that, we also have the added volatility of it being an election year. And if we look back historically throughout the last 70 years, we could see that on average for election years in the months of October, the market drops an average of about 1 percent.

However, the good news here is that those losses are generally made back up in November and December after the elections, assuming we have a clear outcome. So, even though it might be a little bit spooky to invest in the current climate, statistically, the market is going to continue climbing up, even though we might see some short-term jitters.

But then if you thought that wasn't crazy enough, we got this one: interest rates are now potentially back on the rise. Although before I talk about the implications of this and what this means for you, I gotta thank our video sponsor today: Morning Brew.

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So, thank you so much, and with that said, let's get back to those pesky interest rates.

Now, like I mentioned, interest rates are potentially back on the rise. Which means that maybe savings accounts will start to pay you more money, mortgages will begin to cost more, and the interest rate you pay when borrowing money will begin to increase.

This all started the other week when the price of a 10-year bond increased past 0.8 percent, a rate that has not been seen for months now. And the assumption here is that at this rate, the price of those 10-year bonds could increase past the psychological 1 percent threshold.

And rates like this are rising with the expectation that, more likely than not, we're going to see another stimulus deal. And when that happens, the U.S. will have averted any short-term crisis that could have come up, meaning that long-term bonds are able to pay more as fewer investors want to buy them.

Now, I know that one sounds incredibly confusing and have simplified things a lot, but when you think of these interest rates, all you really need to understand is supply and demand. The more people that are buying these 10-year bonds, the lower the interest rate becomes because more people are driving up the price.

On the other hand, the more people that believe in our economy short-term, the lower these yields go because fewer people are buying them and the higher the yield they have to pay to attract investors.

Now hopefully that makes some amount of sense, but even if it doesn’t, that’s totally okay. All you need to know is that these interest rates are used as a bit of an indicator that maybe, potentially soon, these rates could start to rise off their record lows driven a lot by the upcoming stimulus that's probably going to pass.

Now if you’re wondering why these bond yields even matter in the first place, because it sounds boring, well, I don’t blame you because it is boring. I get it! But it does have some implications on things that are not boring, like savings accounts and mortgages.

Wait, maybe those are pretty boring too, but I find them interesting! So let's talk about it because maybe we can make this interesting.

See, as bond yields go up, banks need to increase mortgage rates to remain competitive to the investors who buy those loans. Therefore, the higher the interest rates that bonds pay, the more likely it is that mortgage interest rates will begin ticking up as well.

Now, of course, it's still too early to tell what sort of impact this is going to have on the housing market, or if this interest rate increase is just going to be miniscule in the big scheme of things. But either way, unless we see another widespread shutdown, the likelihood of mortgage rates dropping any lower than they currently are is rather unlikely.

And if I were to guess, I would say that we’re most likely to see interest rates begin going up, especially if another stimulus is passed. But don’t worry quite yet because mortgage rates are still at their all-time record lows.

So in terms of locking in a refinance or a mortgage, you’re still not too late to do so, but I wouldn’t recommend waiting for too much longer if you're looking to refinance or lock in an interest rate.

Now, on top of that, long-term, we could begin seeing savings accounts start to pay a little bit more interest like we did in the past. Although, like I said, it’s still probably a little bit too early to tell, and we would need to see these interest rates sustained for a longer period of time for them to begin translating over to a savings account.

Overall, though, here’s what you need to do about this: just focus on what you can control. Obviously, go out and vote so your voice is heard—that’s an easy one!

But besides that, volatility like this is going to be normal over the next few weeks to next few months, and it's really up to you to have an understanding of what this means for you and understand the markets enough to not panic sell when things go down.

Likewise, if you're looking to refinance or buy a home, you take the risk that interest rates might be going up by the time you’re ready to do that. I’m a firm believer that you should only buy real estate that you intend to hold long-term with a price that you could comfortably afford regardless of what happens.

So if you have a chance to find that right home and lock in a low interest rate, I would go for it knowing that whatever the price is in the short term doesn’t really make much of a difference.

And listen, regardless of what happens, historically, the market has shown that long-term it’s going to continue going up.

This article from Forbes breaks down the returns from each president since 1926, and as you can see, the chart is always going up decade over decade.

So in terms of what you could do about this: number one, you could smash the like button for the YouTube algorithm; two, you could do your best to budget and cut back on unnecessary spending so you have more money left over to save; three, you could continue reinvesting back into the markets week after week regardless of what happens; four, you could continue to learn and educate yourself on the aspects of personal finance and investing; five, you could make sure you understand your investments so you don’t panic and sell; and six, you could pay down any high interest rate debt that otherwise might be holding you back.

Overall, I’m just a firm believer that the more personal control you take over your money, investing, and personal finance, the stronger the likelihood you will have of coming out ahead, profitable.

And hopefully, this information helps you out so you understand the markets a little bit more, and the more you know, the more profitable you could become with your money.

So with that said, you guys, thank you so much for watching. I really appreciate it! As always, make sure to destroy the subscribe button and the notification bell. Also, feel free to add me on Instagram—I post pretty much daily!

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