Tag Archives: stock crash

Time to go on a Financial Media Diet

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By Steve Lowrie, CFA

Special to the Financial Independence Hub

In my recent mid-year letter to clients, I decided we’d best just call a spade a spade, so I began as follows:

“Let’s not sugarcoat this: 2022 has challenged investors on nearly every financial front imaginable so far this year.”

Stock and bond markets plummeting in tandem, the war in the Ukraine, rises in interest rates, threats of a looming recession … You’re probably already well aware of the volume of news wearing us down. As I wrote to my clients:

“the financial press has gone on a feeding frenzy in response, serving up heaping helpings of negativity upon negativity.”

Everyone loves a Perma-Bear

Whether by traditional channels or social media streams, amplifying extreme news is in large part what the popular financial press does.

They’re not entirely to blame; we consumers tend to gobble it up with a spoon. That’s thanks to a behavioural bias known as loss aversion, which causes the average investor to dislike losing money approximately twice as much as they enjoy gaining it. Our “fight or flight” instincts basically prime us remain on constant high-alert when it comes to protecting our life’s savings.

Media outlets know that, and routinely round up a stable of talking heads to scratch that behavioural itch. Their “regulars” even earn catchy nicknames:

Perma-bear

Back in 2012, economist David Rosenberg put together a presentation called 51 Signs the Economy Is a Total Disaster. (What, only 51?) We know that reality begged to differ. He tried again in 2019, when he declared: “We’re going into a recession … I think it will be this coming year.” It didn’t happen.

Dr. Doom

Whenever the press needs a fresh Armageddon forecast, they know they can call on “Dr. Doom” economist Nouriel Roubini. It doesn’t seem to matter that he’s been mostly wrong far more often than not. As recently as early July, Roubini was predicting a 50% freefall in the stock market. So far, not so much (thankfully).

Recession Man

As reported in ‘Recession Man’: Burry’s Tweets Resonate With Traders Worried About A Downturn, hedge fund manager Michael Burry built his fame from correctly calling the 2007 U.S. subprime mortgage crash. Lately, he’s been posting cryptic tweets to his nearly 1 million followers that “reflect increasing fears of an economic downturn.” As academic Peter Atwater explains of Burry’s popularity:

“The tweets that get shared and liked the most are the ones that fit with how we feel the most … Twitter is an enormous mirror.”

If you look closer, you might spot a card hiding up these soothsayers’ sleeves: with a large, random group of “experts” loudly predicting doom and gloom nearly all the time, basic statistics informs us: a few of them are going to be right every so often, with seemingly uncanny accuracy. Their fortuitous timing makes them look super smart, which earns them even more fame. The cycle continues.

Going on a Financial Media Diet

On many fronts, times are indeed disheartening, and we’re as worn out as you are by the weight of the world. That said, there are already way too many outlets cramming worst-case scenarios down our throats and crushing investment resolve. To offset a bitter pill overdose, following are a few more nutritious news sources to reinforce why we remain confident that capital markets will continue to prevail over time, and that long-term investors should just stick to their plan.

Stock Markets Grow

The following chart is one of our favorites, as it shows at a glance that which the bad news bears routinely disregard: Stock markets have gone up nicely, and far more frequently than they’ve gone down. We have no reason to believe current trends are going to alter this uplifting, nearly century-long reality.¹ Continue Reading…

What Tawcan is doing to cope with this Bear Market

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By Bob Lai, Tawcan

Special to the Financial Independence Hub

Unless you’ve been living under a rock, you probably have heard that the stock market is crashing. Year-to-date, the S&P 500 is down by 23.55% and the NASDAQ is down by 32.76%, and the Russell 2000 is down by 27.4%. The TSX YTD performance of -10.51% actually doesn’t seem too bad when we compare it to its US counterparts.

S&P 500 YTD performance_1

NASDAQ YTD performance_1

I’ll be frank. It’s tough to be an investor right now. Every day your portfolio value is probably down compared to the day before and when you check your net worth at the beginning of each month (if you check that often), it is shrinking fast like an ice cream cone inside a kid’s mouth.When the market is crashing and you’re losing your hard-earned money on paper, it can get really tough for investors. Some investors are probably losing sleep because of the beet-red stock market and want to sell everything and hide cash under their mattresses.Back in February 2020, when there were a lot of uncertainties and fear over the COVID-19 pandemic, the market tanked too. But as the uncertainties and fear cleared away, the market recovered and went for an amazing run.I’d say the current situation is entirely different than what we saw in Q1 2020. The key driver of the stock market crash is the high inflation rate.

Battling high inflation rate

Because interest rates were very low throughout 2020 and 2021, as pandemic restrictions started to lift and pent-up consumer demands for travel, cars, electronics, food, fuel, etc increased, this caused the inflation rate to rise quickly. The Russian invasion of Ukraine caused the price of oil and some commodities to soar further, which drove the CPI even higher.

Inflation rose 8.6% in May in the US, the highest since 1981 – more than four decades!. Here in Canada, we saw an inflation rate of around 6.7% in the same period. This is causing a lot of fear and angst. Both the Federal Reserve and the Bank of Canada are hiking interest rates quickly in an attempt to try to tame the high inflation rate.

Are we going to see the inflation rate start to go down quickly? Or are we’re now battling hyperinflation?

I don’t believe we’ll see hyperinflation like post-WWI in Germany and I think there’s no appetite to see inflation rates in the teens like in the early 80s. The central banks will simply not allow that to happen under their watch. But I have my doubts that the inflation rate will start to go down quickly.

I believe interest rates are still way too low and both the Fed and the BoC should be raising interest rates more aggressively (the Fed did hike interest rates by the biggest amount (0.75%) since 1994 recently). Can we agree that the central banks were too slow in reacting to the pandemic recovery and the pent-up consumer demands? Interest rates probably should have gone up last year but didn’t because there were still a lot of pandemic-related uncertainties.

One thing to keep in mind is that the Fed and the BoC are being very careful about hiking interest rates too quickly. Since many people purchased properties during the past couple of years in a heightened housing price period, some of them do not have additional cash each month to pay for higher mortgage interests. If the Fed and the BoC start to raise interest rates too quickly, this can cause people to default on their mortgages, creating a housing crash, similar to what we saw in the US during the financial crisis. (Apparently nearly 1 in 4 Canadian homeowners ay they’d have to sell their home if interest rates rise more, according to a survey)

Interest rates also impact the unemployment rate. As interest rates rise, companies may decide to freeze hires and lay off people to reduce operational costs and company debt levels. As people lose their jobs, they won’t spend as much money buying things and may have issues paying off mortgages and consumer debt. High unemployment rates also hurt the country’s GDP.

As you can see, interest rates can create a lot of cascade effects and this is why monetary policy can be a very interesting topic.

So what’s my guess when it comes to the high inflation rate? My guess is that the high inflation rate will peak and flatten out later in 2022 or early 2023 before it starts to trend down to the inflation target rates in late 2023.

That’s just a pure guess on my part. As we all know, it is nearly impossible to predict the future.

How do interest rates affect the stock market?  

Well, as interest rates go up, the yield for new bonds also goes up. Since bonds are safer than stocks, once bond yields reach a certain rate, bonds become more attractive to some investors and money starts to shift from the stock market to bonds. As people sell their stocks and buy more bonds, this puts pressure on the stock market (remember, stock prices are determined by demand and supply).

Furthermore, rising interest rates mean it is increasingly expensive for businesses to take out loans. So rising interest rates typically have a negative impact on companies that require a lot of new capital to grow. Tech companies usually are considered in this bucket, hence we’re seeing the likes of Amazon, Google, Tesla, Apple, and other major tech companies’ stock prices dropping like stones in the water.

Warren Buffett has repeatedly compared interest rates to gravity, as they represent the risk-free rate of return available to investors. This in turn affects the relative value of other assets. Since high interest rates make borrowing money more expensive, leveraged bets are therefore discouraged.

“The most important item over time in valuation is obviously interest rates,” Buffett said last year. “If interest rates are destined to be at low levels. … It makes any stream of earnings from investments worth more money. The bogey is always what government bonds yield.” Continue Reading…