The Stock Market JUST Flipped

What's up, Graham? It's Guys here. So we did it! We broke the stock market. I've tried turning it off and on. I've been on hold with customer service, but it won't stop going down. All right, just kidding! But for anyone who's investing in the stock market over the last week, no surprise—it has been a roller coaster of a ride.

Even though I'm a huge proponent of buying the dip, after a while you have to ask yourself, "Which dip should I buy?" Because they've been getting progressively worse. In the last week, stocks have seen their worst drop since before elections in October. Tech stocks have sold off more than 10 to 20 percent, and as of today, the Nasdaq and tech stocks are officially in a correction.

After what just happened, in terms of what's going on right now, this video is a lot more detailed than just the stock market sold off because prices go too high. Too high is bad! Instead, there are some fundamental worries about the state of the stock market that you should be made aware of because this will impact both your money and your investments over the next few months.

So let's talk about exactly why your favorite stocks have begun selling off, what's going on behind the scenes that you should be made aware of, and how the stock market rotation may very well have just begun now that interest rates have started going up. But before we go into a deep dive of exactly what's going on and how you can use this to make money, I just got a small favor to ask.

This is the like button, and as you can see, there's a problem in that it has not been smashed yet, which helps up my channel tremendously and helps out with the YouTube algorithm. I'll even do it with you first—you gotta hover the cursor over the thumbs up button, and then you gotta take a step back and then destroy it. Doing that's totally free, and it's almost as easy as getting your two free stocks down below in the description.

Because Weeble is gonna be giving you two free stocks worth all the way up to $1,850! But you know what? I've rambled long enough, and now let's get into the video. All of this began about a year ago when the Federal Reserve lowered their benchmark interest rates all the way down to zero percent to help stimulate the economy.

Now, it's really important to understand that the Federal Reserve can't just go and say, "Hey guys, so today we decided we're gonna lower interest rates by one percent. Oh no, save the applause, guys! No, no, thank you!" But instead, the Federal Reserve manipulates pricing by buying what's called treasuries.

No, unfortunately, it's not as cool as this type of treasure, but I'll try to make it kind of cool. And here's how it works: Trust me, just listen through to this because I do have a point with all of this. It's gonna start making some sense. Just you gotta understand this.

Basically, when the U.S. wants to go and print more money, they can't just go and walk over to their money printer and then turn it on and then create cash out of thin air. Instead, what they're gonna do is they issue what's called a treasury, which is basically just an IOU to borrow money. Here's my very bad cartoon of how this works.

The U.S. first asks for an IOU, and they say they'll pay you back a certain amount of interest—let's call it one dollar. The Fed could then go and buy those U.S. treasuries, basically just loaning money to the United States, and then the U.S. gets that money and they have to pay it back to themselves.

It's kind of like a margin account where you could borrow against your own portfolio and then money magically appears—except this is with the U.S. dollar. But as we all know, borrowing money is never free, and these treasuries have to pay out a bit of interest. This interest rate that you see right here is dictated by supply and demand.

So the more people that want to buy these treasuries, the less interest they have to pay to attract a buyer. But the fewer people that want to buy them, the more interest they have to pay to make it worth it for someone to invest in them. So when the Fed wants to go and lower interest rates, all they gotta do is go and buy up all the short-term treasuries.

They drive up the price, that lowers the yield, and that in turn translates to lower interest rates. Although once you understand how all of this works on a really basic level, we could start to make some sense over what just happened and why the stock market is having a worse tantrum than my cat, Ramsay, when I try to pet his belly.

Last week, investors began to panic as the interest rate on treasury yields started going up, and they see that as a big red warning sign that inflation might start to increase. Interest rates are getting more expensive, and borrowing is not going to be as free or as easy as it once was. Throughout all of last year, the reason for this is that these long-term treasury yields, like I mentioned, are dictated by supply and demand.

The fewer investors want to buy these, the higher the interest rates need to go to entice people to go and actually buy them. And as you can see, interest rates here have been going higher because fewer investors see this as a good store of value. The biggest reason for that is inflation.

As weird as this is to say, the economy is starting to look as though it's recovering, and that has investors scared. I swear this is totally backward stuff! But if our economy doesn't do well, the stock market goes up because interest rates stay low.

And once our economy is actually doing better, the stock market goes down because they're afraid interest rates are going to go up. And if you think that doesn't make any sense whatsoever, just listen. Employers are beginning to rehire again, people are starting to spend more money, and investors are bracing themselves for inflation.

Well, if investors believe that inflation is going to be more than two percent, why on earth would they go and buy a two-percent bond which would lose all of its value to inflation? The answer to that is they wouldn’t do that, and they are not doing that. This then does two things: Number one, as these interest rates go up it makes the stock market look less appealing in comparison, and two, as interest rates go up, it means borrowing money is more expensive, and that hurts growth in the stock market.

Growth stocks like EV tech and solar have really benefited during a time where interest rates are near zero, but as borrowing money gets more expensive, the valuation of those companies has to go down. Even cash-flowing companies get hit because as the cost of borrowing goes up, their net profit goes down.

So in an effort to address these concerns, the money printer himself, or Jerome Powell, spoke about his plans and what he's doing, but he ended up making things a whole lot worse. See, investors were previously under the assumption that no matter what anyone says, there was not going to be any inflation. With our current technology, manufacturing is actually getting less expensive.

It doesn't cost $70,000 to go and buy a home computer anymore. Flat-screen TVs don't need to cost $5,000. So the price of everyday items is actually becoming more affordable, and that's leading people to start saving more money. That's why every time Jerome Powell reiterates that he's going to try to create long-term two percent inflation, every investor is like, "Yeah, sure, whatever! You've been saying that for a while now. We'll believe it when we see it."

Well, as more people are getting back to work, investors now are spooked that, wait a second, there might actually start to be some inflation. And here's what the Fed had to say: The first point that was mentioned was that because inflation is measured on a year-over-year basis, in March of this year, it's probably going to look a lot worse than it actually is.

Just look at this 10-year chart right here—long-term overall inflation is going down, and on a year-over-year basis, it's looking okay. But if we measure the year-over-year inflation beginning at the bottom of the market exactly a year ago today, it's going to show a substantial amount of inflation only because we're measuring from the lowest point, and that's deceiving.

He says that's normal, it's to be expected, and not to panic when inflation comes out as being really high this month. He also says we might see a surge of temporary inflation as people finally go and take the trips they've been postponing over the last year, but he wants to make it very clear all of that is just temporary, and long term it's going to even out to that two percent.

So in other words, to simplify it even further, the expectation is that most likely we will see some inflation, but it's just temporary—it's nothing to worry about. And because of that, the Fed is not planning to do anything about it. However, what all the investors hoped for was that he would instead say, "Wow, the bond yields are going up way too high over here, and that means interest rates might start to go up too soon! So we're gonna start to buy all the bonds over here to help bring the price down and keep interest rates as low as possible."

Now this was actually done over a decade ago through a strategy called Operation Twist as the Fed sold these bonds and bought these bonds, causing the long-term rates to go down since that impacts nearly everything from mortgage rates and loans to companies, but because no word was mentioned of doing this, the market expectation now is that inflation is going to start going up, interest rates are going to go up too soon, and that is going to hurt the stock market, plain and simple.

To add on to this even further, Meet Kevin also brought up a really good point that a policy which allowed banks to pretty much keep zero reserves is about to expire on March 31st. The TL;DR version of this is that in March of 2020, banks were allowed to keep less reserves so that they could spend more money and loan it out to help stimulate the economy.

But on March 31, 2021, if that option is not extended, banks would have to go and sell off their treasuries to come up with that cash reserve, and in doing so, that would raise the treasury yield beyond where we are today. Now it's yet to be seen what's going to be done about this, if anything, but it's certainly something to keep an eye on, and that is expected to be addressed sometime over the next week.

Right now is certainly a very strange time where good news for the economy is actually bad news for the stock market. But you know what they say—the stock market is not the economy! But in terms of where we go from here, we gotta talk about the great rotation. This is a term used when investors rotate their money out of growth stocks, which benefit from low interest rates, and into recovery stocks, which benefit from the economy opening back up.

It would be kind of like selling Zoom for Simon Property Group or selling Tesla to buy Exxon. Overall, this already has started happening as investors are preparing for the economy to open back up again. And so in many ways, this might continue to happen over the next few months.

The reason for this is because the stock market is very much forward-thinking, meaning we don't care about what's going on today, but instead where we project it to be in the future. Now when the best-performing stocks have been innovative tech companies, we value them on the potential they might be in the future at zero percent interest rates.

But as interest rates go up, those bonds compete with stocks, thereby driving the price down. Long-term value and recovery stocks, on the other hand, tend to be a little bit more resilient to this. That's because they're valued on current cash flow, or in terms of what they're actually making today, and for many, that's seen as a safer investment short term.

Even though long-term, the innovative tech companies might end up taking over, this is also possibly not the best news for real estate either, which saw mortgage interest rates rise above 3% for the first time since last year. That means as interest rates go up, borrowing to buy a house gets more expensive, and because of that, the price of real estate might finally begin to soften.

Now, even though this might seem like really good news for home buyers, it's kind of bittersweet. On the one hand, if prices go down, you save money in the purchase price. But if interest rates go up, you end up paying more money in the loan, so it might not quite end up saving you money. But if demand slows down overall, then that might be a good opportunity for you as a buyer to finally get in the market.

So overall, here's what you need to know: The stock market is reacting to positive economic data, which just means that interest rates may go up sooner than expected. However, the stock market, as we all know, is not entirely rational. Generally speaking, people overreact to good news and they overreact to bad news, with the real value lying somewhere in the middle.

During a widespread sell-off like this, it's probably going to drop more than it should, and that would be a good buying opportunity for you. There's a chance that inflation never comes; all of this is overblown, interest rates stay low, and stocks end up going back up after seeing a drop like this.

There’s also a chance that the Fed extends some of these measures to keep interest rates low and just calm everybody down. This isn't necessarily something I would panic-sell from because honestly, anything could happen. This whole video is really just meant for you to understand exactly how the market works and why it's doing what it is.

As for myself, I've been buying consistently every single day—whether the market is up or whether it's down, I'm still keeping enough cash on the sidelines so I don't just buy the dip and then I have nothing left to buy the next dip if there is one. But overall, I do see this as a good buying opportunity, and even if the markets keep going down way further than where we are today, long term it really doesn't make any difference to me.

I just see this as an extended Black Friday sale. Just remember, the best time to buy last year was when everyone thought the market was doomed forever and was never coming back. And you have to ask yourself now, are people overreacting? Did anything fundamentally change about the companies you're investing in? If the answer to that is no, then why are you panicking now?

On the other hand, if you were gambling on speculative investments with money you cannot afford to lose, then I do think it's worth it to take a step back and just reevaluate your risk tolerance and why you're invested in the companies that you are. But if you're investing in the overall market in sound companies, long term it doesn't matter; just keep buying, keep holding, keep smashing the like button for the YouTube algorithm, and make sure to get your two free stocks down below in the description.

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, like button, and notification bell. Also, feel free to add me on Instagram—posts are pretty much daily, so if you want to be a part of it there, feel free to add me there. As in the second channel, The Graham Stephan Show, I post there every single day.

I'm 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. And lastly, if you guys want those two free stocks, use the link down below in the description, and Weeble is going to be giving you two free stocks when you deposit a hundred dollars on the platform. Those stocks are potentially worth all the way up to $1,850! So it's pretty much free money. If you guys like free money, use that link down below. Let me know which free stocks you get.

Thank you so much for watching, and until next time!