Today it has been a painful day in the markets. The dow is down, the smp is down the sm, the nasdaq’s down the small cap 2000’s down the vix is up. So what exactly is happening? Why did the market come down today in this video i’m gon na talk through that, and obviously, as always talk about what you guys should be doing in my opinion anyway, while the market is coming down, so if you’re looking forward to it and if you’re excited For this one then make sure you do stick around. I hope, as always, that you’re gon na enjoy this one Music so guys, as you said, it was a painful day in the markets, especially if you’ve been invested in some highly valued growth stocks, but generally the entire market. Just didn’t do very well today, so you can see here: u.s stocks, not their first three day losing streak of 2021, so markets have literally been down for three days in a row. The smp index closed lower by zero point four percent, the nasdaq closed, lower by zero point, seven percent and these one kind of concentrated losses. It was really broad across the entire market, but i guess mainly what people want to know is. Why did this happen? What caused the markets to come down like this, and what should we expect moving forward, but, more importantly, as always, what should we be doing during times like this? So there was really two main factors behind the market coming down today.
One of them had to do with the jobless claims which were released earlier today, so initial jobless claims saw to around 861 000 and that’s, despite more states and cities, actually lifting restrictive business measures. Economists predicted around 773 000 jobless claims for the end of the week of february 13, but obviously that was far outweighed when it came in at 861 000.. So the jobless claim that she broke a three week: streak of declining numbers so now, starting to rise and elizabeth conkel and economist. That, indeed, hiring said, the movement of the number is basically going in the wrong direction, going the way that people don’t want it to see it going and it’s actually 6.7 times higher than the pre roni rona era. Now, i think what happened with these jobless claims is obviously they caught people off guard, because people were expecting this 773 000 figure. It came in much higher than that, and it was also a little bit of a surprise because there’s been a lot of recent positive indicators which have really kind of hinted that the economy is doing well. We know manufacturing data showed that factory output is almost back to pre pandemic levels. Producer prices have increased by the most that they have since 2009, and retail sales in january soared by 5.3 percent from december. So, with all of these kind of positive indicators, the initial jobless claims obviously came in as a surprise, and they did have their impact on the market today, however, although people are pointing towards this, i also think that a lot more of the impact came from something Else, and is what we’re going to discuss next.
So, in my opinion, a bigger reason for the falling stock price has been the increasing yield on the 10 year treasury notes. Now today, these traded as high as 1.318 percent, which is close to the all time year. High that was reached in the previous trading session, just in 2021 yields have jumped around 0.4 percentage points, as investors and economists have upgraded their outlooks for us, economic growth and inflation. Now key point to note is that a run up in treasury yields is a headwind for stock markets. So sometimes this can all sound like a bit of gobbledygook and a little bit difficult to understand so i’m, hoping in this video to kind of explain to you guys why the treasury yield rising, actually has this kind of impact on the stock market. So if you guys already know what all this is about, then i do apologize, but for anybody who doesn’t, i hope you find this useful, because i know it can be a little bit difficult to kind of wrap your head around all of this, but you just Put it bluntly, to begin with, i think, a bigger factor, that’s driving the stock market down and has been for the past few days, is the rising treasury yields and what comes with that is the rising fears of inflation and incoming higher interest rates. Now, in normal times, when the economy is doing well, the treasury yield will basically look something like this so here’s, where you have the first year, and here you have say the 10th year, this line represents the yield and the traditional relationship is obviously that the shorter Term earns less money and the longer term earns more money.
Now, what happens when the economy isn’t doing so well and people think that the economy is going to come down like as it did in march, just before the pandemic? And since then, you can’t basically get a yield curve which actually starts looking like this, where in year one you actually get more money and in year 10 you get a lot less money for what you put into the bonds now that’s, obviously crazy, because the longer Amount of time you keep your money in bonds. You should actually be getting more money throughout that longer period of time now. The reason this happens is that during times like in march, when we had the big crash, investors basically flock to the safety of the treasury. Note, which is seen as the safest investment that a person can make now, because so many people go in to buy the bonds. You basically get the supply demand effect, so the prices of the bonds rise, because so many people want to buy them. Investors are flocking to them as a safety mechanism getting themselves out of the stock market, so the prices of the bonds rise. But what happens when the prices of the bonds rise is the actual yields come down and therefore you end up with this kind of inverse relationship? So if ever again you hear anybody talking about the inverted yield curve, this is basically what they’re talking about now. This kind of inverted line is how things have looked for quite some time now, and yields have been like really really really low for a long time because of the situation that the economy and the global and the u.
s economy has found itself in now. During this time, when yields are really really low, it’s a kind of time when the economy is not doing well, so what happens is interest rates are low and inflation is also really really low. Now that has a big impact on the stock market. So you’ve often heard people talking in this market that stocks are too richly valued and then you’ve had other people counted that by saying well, it’s fine for stocks to be richly valued because yields are so low at the moment. The risk free rate, which is the amount of money you can make from things such as this bond, is so low that it’s worth paying the premium to basically be invested in stocks. So you’ll see stocks, for example such as fastly such as tesla trading. At 28 time sales 30 times sales things you might not necessarily see in normal times when we had normal interest rates and people are able to invest in bonds and in savings account and get a higher return than they’re able to at these times, but just to Kind of put it in a basic term bad economic times equals an inverted yield curve, equals low, long term yields and equals higher valuations on stocks, as people basically are willing to pay more in the hopes of having some decent returns that they can’t get anywhere else. Now, what started to happen is the yield curve has basically, in the last couple months, been kind of correcting itself and now is actually starting to rise as well, so the yield curve is now starting to rise and that’s, causing some panic in the stock market.
Now, why exactly is this causing panic, and is it something to be worried about so the reason that this rising yield curve and the yield curve kind of setting itself back to normal is causing panic is because it’s kind of seen as an indicator that the economy Is going to be doing quite well in the near term now why that’s? The worry is because, if the economy does well, what people anticipate is that inflation will also come with that, and if inflation comes with that, then eventually interest rates may have to be raised sooner than has been initially planned and projected by people like the fed. Now, in this video i’m not really going to get into where the inflation is going to come or where the interest rates are going to come i’m just going to explain to you what people think is happening and why it’s having that impact on the stock market. So, as yields rise, people start to think inflation will come and interest rates will get higher and the yields are rising because people are getting more bullish on the state of the economy. Now the reason that this causes jitteriness in the stock market and causes the kind of days that we’ve seen for the last three days is that, when yields start to rise and interest rates eventually rise, it means people can go back to getting returns from things such As bonds from savings accounts and basically from risk free investments, now what that has the effect of doing is the stocks that you see, such as fastly, that have like a 30 times sales.
Multiple people will no longer be willing to pay 30 times sales for a stock like that, because they don’t need to take that risk to get a kind of return. They can get lower returns. Yes, but much more less risky returns by going into these bonds and going into stuff such as savings, so what that does to stock searches? Firstly, such as zoom stocks, which have really really high valuations, is they kind of start to send them crashing down back to more normal valuations, so a stock that might be priced at 30 times itself might now only be worth 15 times itself, because the risk free Rate is higher so when a lot of people make their discount to cash flow and they try to value a stock, they discount the future cash flows of a company back to today’s value and the discount rate that they use is heavily dependent on the interest rate. So if interest rates are very low, they use a much lower discount rate because they’re basically saying they’re not able to get much returns anywhere else. But once interest rates start to rise, people start to see the potential of getting returns elsewhere and therefore they’re willing to pay a lot less today for what a company might be worth in the future. Now, what exactly is going to happen with all this? Well, i can’t tell you, because i can’t predict what’s going to happen in the economy. I can’t predict what’s going to happen in the stock market and i can’t predict what’s going to happen with yields.
But what i can tell you is that if yields continue to rise or look like they’re going to continue to rise and if people start to think inflation is going to come and if people think interest rates are going to be raised earlier than the fed projected. Then you are likely to see a continued sell off of highly valued stocks, not necessarily of the entire stock market, but a very richly valued stock. So people are going to de risk from these risky assets and maybe start making their way back into less risky assets. Now is this definitely going to happen? I don’t know i don’t know if inflation is going to come, i don’t know if interest rates are going to rise. Personally, in my own kind of understanding of where i see the economy going, i think we’re in a very deflationary time and i don’t necessarily see inflation coming in for some time. But again this is just my opinion and, and it shouldn’t be taken as any kind of recommendation of where the economy is headed, it’s entirely possible i’m wrong and it’s entirely possible that even if inflation doesn’t come people get so worried that it’s going to come because They see things such as this increasing yields that the stock market plays off and sells out anyway. So this is basically why you’re seeing the stock market sell off pretty much steadily every single day. Another factor is obviously the market has basically hit all time highs and it seems like it, isn’t really willing to rally any further at this moment in time, then, of course, news like this doesn’t help, so i would recommend that you keep an eye on the treasury Yield it’s really important for any investor.
To really understand this. If you want to understand why what’s happening in the market is happening, if you do see this yield rising, faster and faster and at a quicker pace, you can expect more sell offs in highly valued stocks. That’S all i’ll say to you. I say that, yes, you probably will see more sell offs in highly valued stocks if this yields continue to rise in the near term. So what does that mean? What should you do? Does it mean that you should sell out of all your positions? Does it mean that you should go into a cash? You guys know, in my opinion, that really just isn’t the case. If you have investments which you valued correctly, you’ve done a fundamental analysis on. You know why you’re bullish on that company and where you expect it to be five to ten years from now, and you valued it as well, and you think that you’ve bought it at a price that you consider fair value compared to where you expected to reach Five to ten years from now, then, of course not enjoy the sell off don’t become caught up in selling these stocks off, enjoy the sell off and enjoy buying those stocks up at cheaper prices. So, firstly, for example, i have waited a really long time for that stock to come back to anywhere near 65, because that’s the kind of price where i’m really interested in buying heavily into that stock.
It’S not got that far yet, but it has come down from around 120 we’re now at around 80, and if the market continues to sell off and come down to around 60, it might be a company that i look to get invested in much more heavily. I think if you are invested in very very highly valued stocks, you might have a little bit of stuff to be concerned about. You might need to kind of have a look at your positions and think did i buy this stock while it was ice all time high? Did i value this stock and did i look at where i expected to be five years from now and if you’re in a stock that’s like 60, 50 30 times it sales, and you don’t, really know where you vision it to be five years from now, then? Maybe have a look at positions such as that, but if you’re in companies you believe in and you believe you paid a good fair price for them and you know that if they come down, all you want to do is add more to those stocks that’s. What i recommend to do don’t, wait to see how far the market falls. Time in the market is rarely helpful for anybody more money is actually lost. According to many people by people trying to time the market, then in actual market crashes themselves, so just get into the stocks that you, like our prices that you think are fair, enjoy the sell off.
If it comes, and just add to the positions that you want to hold for the long term that’s my recommendation to you guys as peter lynch, one of my favorite investors, said that for 15 minutes, if you spent 15 minutes understanding the entire economy, you probably are Wasted 10 minutes so so just be invested in companies that you really like and pay fair prices for them. Don’T invest in companies at any old price or whatever price they are that’s. Not the correct approach, in my opinion, make sure you pay a fair price relevant to the kind of returns you’re hoping to receive in the next couple of years moving forward, but i hope you guys did find this video useful. I hope you found it helpful in some way shape or form. If you did then do, let me know in the comments below and more importantly, let me know by smashing that like button, because it helps me out more importantly, it tells youtube and the algorithm that you enjoy my videos and that really helps boost the channel as Well, if you want to see more content like this, then also consider subscribing and becoming a part of the foolish investing family and hit that notification bell.