8/17/21 Stock Market Update

 

We’ve just been hit with a deep stock market correction, lasting all of 2 hours. Just kidding, but we did get a healthy sell off before the next rally to S&P 500 4500-4600. A sell-off is usually around 3 days, so there could be some more pain ahead tomorrow. My growth stocks got hit harder than the broader indexes, and along with the leverage, portfolio dropped 10%. Small cap stocks also got hit hard. Thankfully my margin requirement went down along with the stocks, so no margin call. A margin call usually happens when the margin requirements go up.

My game plan

I usually have plenty of TMF (treasury bonds) to sell to prevent a margin call. TMF has been going up during this sell off. It allows you to take greater risk and this has proven itself time and time again. Thus far the sell off is minor. Have been getting one every month. Not making any changes yet. My gameplan if it is a larger 10%+ correction is to sell my TMF. Once 10 year treasury yields rise back to 1.7%, I’m going to buy it all back on the cheap.

Why is there a sell off

This sell off is seasonal low volume during August-September. In the fall is when things usually pick up again. As trading volume drops, liquidity drops and this causes a drop in the underlying stocks. The sell off has nothing to do with Afghanistan or a drop in consumer demand. It has nothing to do with Delta, which is pure happiness for stocks as that means Fed will delay tapering.

The future

There is a lot of cash sitting in the sidelines and a record number of investors. There is twice as much money in the country compared to pre-COVID due to the nonstop printing of US Dollars via the Fed’s monetary policy. This means a market landscape where people have been buying up every dip. The stock market is not over-leveraged, but quite the opposite. So there is plenty of potential for a big run to end the year. I see low interest rates for next 2 years. The Fed has the market’s back and will not let it collapse.

After interest rates rise again, it would be time to invest more conservatively. I think stocks will become more and more overvalued in the years to come just because there is so much cash sitting on the sidelines. In addition, there is potential for more leveraging. Right now the market is fearful, which is bullish. A euphoric market is when there is danger. The big crash will come eventually but it won’t be tomorrow. More like 2028 or even later. In the meantime enjoy the quadrupling of your stocks.

Beware of articles warning that the market is overvalued. It’s been the exact same article in 2014, and look at where the market is now. Who says that the P/E ratio of the S&P 500 has to be 15-20? That was during a time when few people invested and the fee was $50 per trade and you had to wait on the phone with a lot of money on hand. Note that the P/E ratio is a very volatile number with no historical correlation to stock performance. The game has changed because there are far more investors than before with free trading (zero commission), free analysis on the internet, and modern trading apps. The interest rates are also getting lower and lower over time, and will eventually turn negative. Stay invested, guys.