🐻 The S&P 500 $SPX500 is 𝙙𝙤𝙬𝙣 𝟮.𝟯% 𝙛𝙧𝙤𝙢 𝘼𝙡𝙡 𝙏𝙞𝙢𝙚 𝙃𝙞𝙜𝙝 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.
🧺 The main reason for this selloff are 𝙞𝙣𝙛𝙡𝙖𝙩𝙞𝙤𝙣 𝙛𝙚𝙖𝙧𝙨 𝙖𝙨 𝙗𝙤𝙣𝙙 𝙮𝙞𝙚𝙡𝙙𝙨 𝙖𝙧𝙚 𝙧𝙞𝙨𝙞𝙣𝙜. 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.
🎈To 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 𝙨𝙩𝙤𝙘𝙠 𝙢𝙖𝙧𝙠𝙚𝙩 𝙗𝙪𝙗𝙗𝙡𝙚 today fueled by the Federal Reserve System through low interest rates and quantitative easing.
🖨️ Since government bonds are not attractive with the low yields, the government forces the banks to buy these bonds and then 𝙥𝙧𝙞𝙣𝙩 𝙢𝙤𝙣𝙚𝙮 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.
📉 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 𝙨𝙚𝙡𝙡𝙤𝙛𝙛 𝙞𝙨 𝙩𝙧𝙞𝙜𝙜𝙚𝙧𝙚𝙙.
💸 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 𝙖 𝙨𝙩𝙤𝙘𝙠 𝙢𝙖𝙧𝙠𝙚𝙩 𝙘𝙧𝙖𝙨𝙝 𝙞𝙨 𝙖 𝙗𝙪𝙮𝙞𝙣𝙜 𝙤𝙥𝙥𝙤𝙧𝙩𝙪𝙣𝙞𝙩𝙮 for him. Same for me :)
💰 Nobody knows what will happen to the markets in the short term. It is impossible to time the market. What matters is that we 𝙛𝙤𝙘𝙪𝙨 𝙤𝙣 𝙛𝙪𝙣𝙙𝙖𝙢𝙚𝙣𝙩𝙖𝙡𝙨. 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.
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