I haven’t had anything to say for a while. Today I do. So for the bots and social media marketers who still “read” this blog, I give you my thoughts. These thoughts are on the stock market.
This is not very typical of me and this blog. I started it largely because I wanted to post non-business-y topics. You know, writing, calligraphy, art, books. But today, the stock market is at top of mind.
The stock market will decline by about 70% over the next three years.
There, I said it.
Why should you listen to me? You shouldn’t. This is just some guy’s blog.
It will happen though.
It all has to do with interest rates, and with the Fed poised to raise them, you can be sure that there will be an impact, and that the impact will be pretty big. Why will they be raising rates? Because of inflation in an overheated economy. And because they said they would.
My thinking is this, higher interest rates of even 1% will result in about a 8% loss in face value of a 10 year treasury bond. Try selling a 1% bond for $1,000 in a market where you can get 2%. Note that 10 year treasury yields have moved from 1.1% in August last year to 1.9% now (I picked the low in Aug for effect, but still).
What do interest rates have to do with anything?
Well, they impact the cost of everything. The Fed sets interest rates, bond rates, overnight lending rates, the cost of direct loans to banks. These in turn impact mortgage rates, which impact housing prices, and running cost for businesses. In short the Fed determines the cost of debt. Low cost of debt means more buying. The opposite, high cost of debt, does the opposite.
So what about the stock market? There are two things, 1) consumers will spend less so company profits will fall (in the long term), 2) the cost for companies to borrow will increase, so profits are harder. It costs banks more to borrow money, so they increase the lending rates to customers. Some of those customers are companies, so they increase prices to cover costs. But also, credit card and mortgage rates go up, especially if they’re variable interest rates. We still gotta pay the bills, so we have less disposable income. We spend less on stuff companies are selling. Less buying means lower profits. Lower profits mean lower stock prices.
So why do you say 70%?
History. In 1999 the Fed increased rates 3 times, then again twice in Feb and Mar of 2000. Then Fed chairman Greenspan famously called the markets (or players in the markets) “overly exuberant.” On Mar 15, the NASDAQ peaked. While there were relief rallies, the pain didn’t stop till 2003, when it bottomed 70% lower. Note that the 70% crash was in the NASDAQ, which had increased 380% from 1995 to 2000. The rest of the market was less impacted.
In the present, the Fed is supposed to lower rates 3 times in 2022. Some say by 50 bps in Mar, which is like lowering twice, and the NASDAQ is up 230% in 5 years. It’s not exactly the same, sure. But higher rates will hurt an already fragile market, imho.
Anything else, or are you just still experiencing PTSD from 2001?
Nope, that’s about it. I could try to convince you by doing research (copying from real websites), but I won’t. I’ll just take my Xanax and go to bed.
Edit: I sold everything I own, including in 401k’s, and went to cash on Jan 4th.