How To Use The 2023 Market Crash To Get Rich

What's up guys? It's Graham here. So today, we have to answer the age-old question that philosophers and economists have pondered since the beginning of time, and that would be: Am I wearing pants? And the answer is no. Just kidding! Instead, it's whether or not we could finally see the market begin to recover in 2023, or if it will continue falling with the worst still yet to come.

After all, retail investors are officially buying the dip, with some analysts believing that we could soon be in for another 2023 bull market, while others, like Goldman Sachs, take the stance that we will continue seeing a market crash. Stocks are still not cheap by historical standards and will likely fall back down another 20 percent. That's why I think it's incredibly important that we go over the data to determine whether or not there's an accurate way of predicting the bottom of the market. Here are the Bull and Bear cases for determining whether or not 2023 is going to be a winner or a loser, and then go over the best ways that you could use all of this information to make money.

On this episode of "Don't Drive in the HOV Lane with an Inflatable Grinch," in case you're wondering, although before we start, if you enjoy these videos and you find them helpful, it would mean a lot to me if you hit the like button or subscribed if you haven't done that already. I know it sounds silly, but it does help with the channel tremendously, and as a thank you for doing that, here's a picture of a giraffe. So thank you guys so much, and also a big thank you to public.com for sponsoring this video, but more on that later.

Alright, so in terms of why the market keeps falling, blame Jerome Powell. No, seriously! For the last year, the vast majority of stocks have decreased anywhere from 15 to 80 percent due to an increase in interest rates and a strategy called quantitative tightening, where the Federal Reserve begins to sell or remove assets from their balance sheet, causing prices to fall and rates to increase.

See, prior to 2020, anytime a company needed money or a bank wanted to issue a loan, they'd have to rely on institutional investors who had only been an amount that was relative to the risks that they would lose money. But when everything shut down, and those investors were cowarding in the corner while grasping onto whatever cash they had left, the Federal Reserve stepped in to backstop those investors and buy up whatever assets were being offered just to prove to the market that everything was going to be okay.

Obviously, that strategy worked, but the FED is not in the business of building a portfolio the size of Wall Street bets. So, eventually, they had to sell. But now that the FED is no longer an active buyer in the market, that leaves it up to investors to decide how much they're willing to pay. And with risk-free interest rates now around four and a half percent, those investors are demanding a premium for investing in anything that's slightly more risky, and in turn, stocks in real estate look a lot less appealing.

Just think of it this way: what if I told you that you would be able to get a risk-free guaranteed return of six percent, or you could take your chances in the stock market for maybe an average of seven percent? What would you pick? Now, it's never a directly proportional relationship, but the math is generally true; the higher you make risk-free, the more you have to get paid to take on risk, and is proof.

Just consider this: I've mentioned this before, but it's worth repeating. One study analyzed investor behavior when risk-free returns were low and compared those to the same investors when risk-free returns were high, and the results were surprising. It was found that throughout a representation of the entire U.S. population as well as 400 Harvard MBA students, low risk-free returns caused significantly more risk-taking for higher-yielding investments.

Those findings began to normalize when risk-free interest rates are higher, even when the riskier investments still pay the same amount more. Now, I know that sounds incredibly confusing, but for all of you visual learners out there, this basically means that when interest rates are at zero percent, seventy percent of a customer's portfolio went into risky investments, driving up their price. But when risk-free interest rates are at five percent, their risky investments dwindle back down to fifty percent, reflecting a more balanced portfolio.

On top of that, they also found diminishing returns on safe behavior once interest rates were above five percent. So the most risk-taking takes place when interest rates are below that amount, which very accurately reflects these last few years. Based on this information, we might be able to conclude that the worst would be behind us once risk-free interest rates are above five percent, although we'll talk about that shortly.

But in terms of how you could identify the bottom of the market, or whether or not you'd be able to outperform it, there's a piece of research I want to comment on because this begins to make a lot of sense. First of all, I want to give full credit to the blog Market Sentiment for compiling all this information. I would highly recommend subscribing to the newsletter. I'll link to them down below in the description because they compile some of the most interesting investment analysis on the internet, and their latest findings all have to do with learning how to beat the market.

See, as they point out, passive index fund investing is relatively new. So new, in fact, that 2019 was the first year ever where index funds overtook actively managed funds in terms of assets under management. So why is this a big deal? Well, two things happened. First, the Great Financial Crisis of 2009 shook a lot of investor confidence and caused a lot of people to be wary of the investment industry. And second, there was a substantial pile of data showing just how poorly actively managed funds performed.

For example, they say that only six percent of actively managed large-cap funds managed to beat the S&P 500 over a 20-year period. So the option then becomes: do you take a one in sixteen chance of getting a higher return or be guaranteed to get a higher return ninety-four percent of the time by investing in an index fund? Of course, for some context, index funds do really well for one reason: they aggregate a basket of stocks for the top companies that drive the majority of growth.

And if you take something like the S&P 500, you could see exactly how it works. When a stock is listed on an index like this, it's got to meet three key requirements. Number one: it's got to be listed in the United States, and its shares must be highly liquid. Number two: the market cap has to be at least eight billion dollars. And three: they must have positive earnings in the previous quarter and positive total earnings throughout the last year.

From there, an index committee meets every quarter to discuss the performance of every company on the list, and if one stock falls behind relative to another, they're quick to cut it and replace it with something else. However, when you dig a little bit deeper, you'll begin to notice that within the S&P 500, the top twenty percent of stocks account for pretty much one hundred percent of the growth.

So one investment analyst took it a step further and back tested more than a hundred years of data to determine which companies would be the future market movers before they moved the market. He found two factors that were incredibly consistent. One: it must be a company in the top half of the market, meaning greater than average market cap, shares outstanding, cash flow, and sales. He found that under those conditions, companies gave close to double the return of the S&P 500 while only adding slightly higher risk.

Or more simply put, he theorizes that the best performing companies out of the biggest companies provide the best returns. And two: he says that you should pay close attention to the price-to-earnings ratio. He found that all stocks with a high P/E ratio performed substantially worse than the market, whereas low P/E ratios tend to do much better. Some of this might seem common sense because a low P/E ratio signals a cheaper stock relative to their earnings, but it is a good reminder that high valuations cannot be sustained when the market has its tendency to revert back to the average.

Now, of course, if you don't want to take the risk in finding the next big best company, I don't blame you because there's something else that everybody needs to be made aware of. Although before we go into that, when it comes to investing, our sponsor public.com wants to give you a head start by giving you access to all the information and analytics that matter the most.

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And now, with that said, let's get back to the video. Alright, so in terms of picking individual stocks, here's where things get interesting. A finance professor from Arizona State University analyzed 26,000 individual stocks since 1926, and what he found was mind-blowing. He found that the average stock only traded for seven years and lost money, even when you include the dividends.

In addition to that, from the 26,000 stocks that were analyzed, only a thousand led to all the growth that we saw in the stock market since 1926, and only 86 stocks out of those thousand were responsible for more than half of the profits. So from this data throughout the last hundred years, only four percent of stocks actually made more money than the average return of one-month treasury bills, and the other ninety-six percent of those winning stocks barely kept pace with inflation.

Now keep in mind, this analyzed all the stocks throughout the last hundred years. That includes a lot of penny stocks and IPOs, the dot-com bubble. So, when you account for the largest publicly traded stocks today, eighty percent of them make money over a ten-year period, but still, fifty-six percent of them performed worse than the overall index, only because a select few leave the group in any given time frame.

That means just like a casino, the odds are stacked against you if you pick individual stocks on a whim. Although, with that said, that does present another interesting question: even though you might not be able to pick which stocks do best, what about being able to predict the bottom of the market? Well, one option suggests that we look no further than what's called the yield curve.

Simply put, this is a graph that outlines how much investors could expect to earn throughout one month to thirty-year terms. And the longer you invest your money for, the more you should get paid, right? Well, when the yield curve inverts, short-term rates begin paying more than long-term rates, and this signals that investors see more risk investing in the short term than they do in the future.

So, in terms of reaching the bottom, one analysis found that the bottom has never occurred until the yield curve is non-inverted, and today, we're the most inverted we've been in more than 40 years. Now some could certainly argue that this is a lagging indicator, much like someone else who says the bear market is over once the prices go up by 20. But this could certainly be just one data set that's used in conjunction with something else.

Like number two, the VIX. Morgan Stanley says that generally speaking, we do not see a bear market bottom without panic selling, similar to what was seen in 2001 and 2020. Historically, no bear market has ever bottomed without a VIX reading of 45 or more, and sure enough, in recent history, that's true. The third analysis best article pointed out that a contrarian way of finding the bottom could all be attributed to what's called the put-to-call ratio.

Simply put, for those unaware, a call is a bet that the price of the stock will increase, and a put is a bet that the stock will decrease, and when the stock market sees 1.8 puts for every call, that's a sign of retail capitulation where the worst is probably already priced in. And four: look at the 200-day moving average. Ally also suggests that when less than 20 percent of companies are trading above that 200-day moving average, the market is mostly bottomed.

Today, approximately 37 percent are trading above the 200-day moving average, but as you can see, every time it's fallen below 20 percent, the market has proven to be a long-term buying opportunity. Keep in mind that one or two of these on their own is probably not an indicator of the precise bottom. But when you combine all of them together, it could be used as an indicator as to whether or not the market is expensive relative to history.

As far as what the experts believe is going to happen, it all depends on who you ask. JPMorgan, for example, believes that the recession is mostly priced in, with stocks having already declined 20 percent, and with only two exceptions in 2008 and 2000, the market tends to be higher the following year. They also found that the market moves ahead of earning forecasts, meaning there's a limited downside once stocks have already fallen.

That's why they think that a bottom may be coming soon and that stocks are priced much better today than they were a year ago. But Goldman Sachs, on the other hand, believes that a peak in interest rates and lower valuations reflecting a recession are necessary before any sustained stock market recovery can happen. Their view is that the S&P 500 is probably going to remain relatively unchanged over the next year.

And Morgan Stanley agrees. As far as what I think, for whatever that's worth, I believe that most of the information that we have at our disposal is already priced in, and any change in either direction is going to send the market up or down accordingly. I know that's the captain obvious answer, but the truth is the stock market is completely detached from the economy, and a lot of the daily movements are somewhat irrational.

That's why it's often best to keep an eye on market metrics, but it's not a good idea to base your entire investment philosophy around it, because from my experience, the market tends to do the exact opposite of whatever you think is going to happen. So with that said, guys, thank you so much for watching! As always, feel free to add me on Instagram, and don't forget our sponsor public.com wants to give you a free stock that's worth all the way up to a thousand dollars when you make a deposit using the link down below in the description with the code Graham. Enjoy! Let me know which free stock you get. Thank you so much for watching, and until next time!