Don't gamble with money you need soon

https://www.wsj.com/articles/the-market-is-melting-down-and-…

**The Market Is Melting Down and People Are Feeling It. ‘My Stomach Is Churning All Day.’**
**Many are watching investments they meant for down payments, tuition or retirement shrink day after day**
**By Justin Baer, The Wall Street Journal, May 21, 2022**

**...**
**To investors it can feel there is no safe place. While the vast majority of individual investors are holding steady, that is in part because customary alternatives don’t offer much relief. Bonds, normally a haven when stocks are falling, have also been pummeled. The cryptocurrency market, pitched as a counterweight to traditional stocks, is sinking....**

**“The Fed can’t solve the supply shortage of corn or fertilizers, or the inability to get natural gas into Europe. They can’t build a sufficient inventory of homes.”**

**The plunge is a U-turn from stocks’ runup in 2020 and 2021. Then, unusually low interest rates and a surging money supply — byproducts of the government’s efforts to stave off a downturn — pushed stock indexes to repeated new highs. Some investors say the decline was long overdue and, now that it has arrived, could be difficult to repair....** [end quote]

The stock market is NOT the economy. Prices that investors are willing to pay for stocks (and other assets, like cryptocurrency) is influenced by the amount of money they have to invest and also by animal spirits – emotional actions based on greed and fear.

https://www.investopedia.com/terms/a/animal-spirits.asp

**Animal spirits describe the psychological and emotional factors that drive investors to take action when faced with high levels of volatility in the capital markets.**

Animal spirits drew many investors to speculate more and more in the rising stock market (and other assets, such as crypto). But falling markets can pull animal spirits toward fear, exacerbating the drop.

The Wells Fargo Animal Spirits Index has been dropping for months. The index consists of five indicators: the S&P 500 index, the Conference Board’s Consumer Confidence Index, the yield spread (between the 10-year and three-month Treasury notes), the VIX Index and the Economic Policy Uncertainty Index. As the Fed raises the fed funds rate, the 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity spread will decline.

https://wellsfargo.bluematrix.com/links2/html/1f26cf64-28cb-…
https://fred.stlouisfed.org/series/UMCSENT
https://fred.stlouisfed.org/series/USEPUINDXD
https://fred.stlouisfed.org/series/T10Y3M

The stock market has been very volatile lately. It’s recently common to see up and down moves of 3% per day. That’s not normal since the usual movements are under 1% per day. The VIX is not up to the major financial crisis level, but it is similar to volatility seen in 2000-2002.
https://fred.stlouisfed.org/series/VIXCLS

In a (nonexistent) world where investors price stocks according to their earnings per share, stock prices would never advance faster than earnings per share. It’s hard to find a data series for EPS so let’s approximate it by real GDP growth rate.
https://fred.stlouisfed.org/series/A191RL1Q225SBEA

We all know that the stock market indexes have grown much faster than the growth rate of GDP, especially “growth” companies whose expected future earnings are projected into the current price of their stock. This requires forecasting. As Yogi Berra said, “It’s hard to make predictions, especially about the future.”

The Net Present Value of future earnings is calculated using an interest rate. (For those who actually do calculations and don’t rely on animal spirits.) When interest rates rise, the NPV of future earnings falls.

Due to rising inflation, the Federal Reserve is raising interest rates.

This is why I think that stock prices will not return to their 2021 peak soon.

  1. The Federal Reserve suppressed interest rates at all durations to NEGATIVE real rates, historic lows that were an emergency action to prevent a financial crisis and recession after the Covid shock. They are not likely to use these emergency moves again unless there is a similar crisis. A normal cyclical recession would not qualify as a crisis.

  2. Congress sent a massive amount of fiscal stimulus to consumers in 2020 and 2021. Much of this was not immediately spent, but was invested in the stock market by inexperienced investors whose animal spirits carried asset prices far above the norm. These “Economic Impact Payments” are not likely to be repeated.

  3. When a bubble bursts, it takes decades for P/E ratios to climb to the ridiculous heights of the bubble. A bubble is different than the normal ups and downs of the typical business cycle.

https://www.multpl.com/shiller-pe

Bottom line: Don’t gamble with money you will need… especially if you will need it soon. The stock market has a long way to go to hit bottom.

Wendy

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As Yogi Berra said, “It’s hard to make predictions, especially about the future.”

Tru Dat! I’ve proved it myself many times.

As Yogi Berra said, “It’s hard to make predictions, especially about the future.”

Tru Dat! I’ve proved it myself many times.

Actually it’s pretty easy.

What’s hard is making predictions for - simultaneously - far enough in the future, and soon enough, and specific enough, to be interesting… that also prove accurate.

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Actually it’s pretty easy.

What’s hard is making predictions for - simultaneously - far enough in the future, and soon enough, and specific enough, to be interesting… that also prove accurate.

Physicist Dr. Michio Kaku has made a number of eerily spot on predictions. He says his predictions are all based on the assumption that computer power will increase a lot. And sure it enough, it does.

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