After one "good day" yesterday, the markets are back down with oil prices falling by 2%. The Bank of England cut interest rates by 25 basis points. In our portfolio, our gold miner, Polymetal $$POLY.L is doing well today as well as our bond positions with $TLT up by over 2%. All of our other stocks are down.
Oil & Stock Market Crash - What's next?
Oil $OIL prices fell by 30% on Monday while the S&P 500 $SPX500 fell by 7.6%. This is the worst day for oil since 1991. Let's see why oil, the stock market and everything else is crashing and what we should do about it.
The real problem with oil is supply and not demand. Although the demand of oil is now lower than expected, the reason why oil prices are low is because of an over supply in the market. The two big oil producers used to be Russia and Saudi Arabia but share oil drilling in the US changed everything. In just a few years, the US became the largest oil producer. In the US, oil companies control oil production while in Russia and Saudi Arabia, it is the government. These two countries decided not to increase productions so that they can still make money. This is bad for everyone, for Russia, Saudi Arabia and the US companies. In the long-term, they will have to collaborate, otherwise, everybody is a loser. This is Game Theory.
Usually, low oil prices is a good thing for the US economy and stock market but that's not what we are seeing. The banks are affected because of oil derivatives but for other companies, lower oil prices should have been a good news. What's causing the stock market to crash is fear. People are panicking and selling all their risky assets. That's why even Gold $GOLD fell on Monday. Passive investing and algorithmic trading triggers more selling. That's why this is the fastest correction in history. This volatility will continue for months especially with the elections coming.
If the markets enter a bear market, this will be a bad news for Donald Trump. The probability of a recession is increasing. Bernie Sanders may be the winner from this as there is no better time to blame capitalism than during a recession.
That's why I've been telling you to buy gold and bonds. The arbitrage, gold miner, bond ETFs in my portfolio really protected my portfolio on Monday. You need to diversify your portfolio between different asset classes. And you need stocks that are uncorrelated with each other from different countries.
Stocks are still expensive. The S&P 500 is at the same price it was 10 months ago. That's not cheap. Apple $AAPL is at the same price it was in December. You need to look for individual stocks instead of just investing in random stocks or buying the whole index.
Everybody will make predictions about what will happen in the short-term and long-term. What's important is that your portfolio is prepared for anything. Warren Buffett's number one rule of investing is not to lose money and number two rule is not to forget rule number one. I'll add one more rule, buy low, sell high. It is that simple.
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