Stock Market Crash 2021?
๐ป The S&P 500 $SPX500 is ๐๐ค๐ฌ๐ฃ ๐ฎ.๐ฏ% ๐๐ง๐ค๐ข ๐ผ๐ก๐ก ๐๐๐ข๐ ๐๐๐๐ while the NASDAQ 100 $NSDQ100 is down by more than 8%. Some of the most popular stocks are already in a bear market. Is this a stock market crash? Not yet and as 2% drop in the S&P 500 is nothing.
๐งบ The main reason for this selloff are ๐๐ฃ๐๐ก๐๐ฉ๐๐ค๐ฃ ๐๐๐๐ง๐จ ๐๐จ ๐๐ค๐ฃ๐ ๐ฎ๐๐๐ก๐๐จ ๐๐ง๐ ๐ง๐๐จ๐๐ฃ๐. But if it was only inflation fears, why would gold $GOLD and stock prices fall? The main reason given is because bond traders have to cover their losses and need liquidity. Inflation fears might only be a consequence of the selloff and not the cause itself.
๐To know the cause, we need to understand why stock prices were at all time high just a few weeks ago in the middle of recession. We have a ๐จ๐ฉ๐ค๐๐ ๐ข๐๐ง๐ ๐๐ฉ ๐๐ช๐๐๐ก๐ today fueled by the Federal Reserve System through low interest rates and quantitative easing.
๐จ๏ธ Since government bonds are not attractive with the low yields, the government forces the banks to buy these bonds and then ๐ฅ๐ง๐๐ฃ๐ฉ ๐ข๐ค๐ฃ๐๐ฎ through the Fed to buy them back. This is how the government adds liquidity to the system. However, recently the government has been taking more and more debts without the Fed buying much of them. Therefore, US Treasury bond prices are falling causing an increase in the yield.
๐ As we saw in 2008 how the whole financial system is interconnected, higher bond yields will lead to inflation fears, leading to more selloff in the bond market, then covering through a selloff in stocks and gold. With all the passive investing and algorithmic trading, further ๐จ๐๐ก๐ก๐ค๐๐ ๐๐จ ๐ฉ๐ง๐๐๐๐๐ง๐๐.
๐ธ For example, the active ETF $ARKK AUM is increasing even if the price of the ETF itself is going down. But at some point, the speculators will begin selling, forcing Cathie Wood to sell the shares in the ETFs, for example, Tesla $TSLA which is their largest position. That's one of the main problems with active ETFs. Warren Buffett doesn't have this problem as ๐ ๐จ๐ฉ๐ค๐๐ ๐ข๐๐ง๐ ๐๐ฉ ๐๐ง๐๐จ๐ ๐๐จ ๐ ๐๐ช๐ฎ๐๐ฃ๐ ๐ค๐ฅ๐ฅ๐ค๐ง๐ฉ๐ช๐ฃ๐๐ฉ๐ฎ for him. Same for me :)
๐ฐ Nobody knows what will happen to the markets in the short term. It is impossible to time the market. What matters is that we ๐๐ค๐๐ช๐จ ๐ค๐ฃ ๐๐ช๐ฃ๐๐๐ข๐๐ฃ๐ฉ๐๐ก๐จ. Those stocks which were expensive are still expensive, those which were cheap are still cheap. My strategy didn't change, invest in great businesses, at discount prices for the long-term.
Watch the full video on YouTube:
https://www.youtube.com/watch?v=0hRe47XHKuQ&list=UUPO3uUyoXSaFWG-Ldq1mqEQ&index=2
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