Mar 16, 2020
What is happening with the stock market?
In the last month, the stock market has been consistently down so I wanted to write a quick article about it.
This is not going to justify why someone should or should not invest in the stock market. This is not an argument of right or wrong. This is just the facts.
What does it mean that the market is down?
It means the prices of stocks declined over a certain period of time. A stock is a certificate of “ownership” in a company and it is valued in the market where it is bought and sold buy consumers.
A stock can be up, meaning the price is up. A stock can be down, meaning the price is down.
When someone says “the stock market is down” it means the majority of the stocks that are bought and sold on that market declined in price to the degree that the average as a whole is down.
Does the money disappear when the market goes down?
No. The market was up and enough people sold at a profit that it caused the market price to drop. The money was not lost, it was transferred to the last person who sold.
Remember, stocks are a game of buying and selling. If you own a stock and sell it to me at a profit, you made money. But if enough people did that at the same time, when I bought it the price would go down. I lost money. You gained money.
What’s causing the market to go down?
Well, to understand that we need to understand what was causing the market to go up.
There are a few factors. The first being is that our government was printing money and giving it to financial institutions for them to put to work in the market. All this extra cash made things seems like they were going well and caused market prices to increase.
Companies were also buying shares of their own stock. Interest rates to borrow money are low and for larger companies the interest rates to borrow are lower than the dividends they are paying to their shareholders. So they are borrowing money at a really low interest rate and using that money to buy back their stocks in order to save money. This is a huge amount and equates to trillions of dollars. This artificially inflated the price of stocks because of all of this buying.
Another one is financial consumers. Those in 401k’s and pensions and retirement accounts. Think of a swimming pool. What happens to the water levels when more and more people get in the swimming pool? It climbs. Only there isn’t really more water in the pool, it is simply the volume of people takes up more mass and the water has no choice but to go up. That is what has been happening with stocks.
So what’s happening now?
Well, for starters, because of the money the government has been giving to financial institutions, that growth isn’t real. It’s kind of like when I buy something on a credit card. I feel good and I have a new thing, but that money still needs to be paid back. So yes this caused growth, but also that money needs to be accounted for in one way or another in order to offset it with real money and real growth. Otherwise it isn’t sustainable.
Another factor is that an all time high of Fortune 500 CEO’s have resigned from their positions in the last year. These people are compensated with stock options, meaning they are given stocks in the company as part of their pay plan. Do you really think they kept all of the company stock after they quit? I’d sell and cash out if I was in that position.
Also, we have trade issues going on which effect supply and demand and that can effect the market because many of these companies have had their supply chains effected.
Russia and the middle east decided to drop oil prices as well, which effects a large part of our U.S. Economy and also reduces market growth.
Lastly, we have this coronavirus everyone is obsessing about. Now, I don’t know a single person who has been sick with it, but I do know millions of people who have changed their travel, spending, and personal habits because of it. We kind of have the perfect storm.
A bubble always pops.
It’s easy to say the virus is the reason why the market has crashed, but a bubble can’t pop unless it was filled with hot air.
So I care less about what popped the bubble because that part is pretty random and unimportant. The more important question is:
What caused the bubble?
Remember how I said the government was putting money into the markets and these companies were buying back their own stocks?
Well that’s some of what caused the bubble.
It will go unaddressed.
The market will eventually tank. People will blame the thing that popped the bubble and as per the usual, the thing that caused it will go ignored.
This is the reason why I don’t invest in stocks.
If the government and large corporations can manipulate the markets that easily and I have no control, then I want no part in it.
If you’re reading this and you agree with what I agree with, I want to show you where I put my money instead.
Own Your Potential,
Jerry Fetta
Jerry Fetta helps create financially educated and wealthy families who navigate their economic futures with certainty and help build prosperous communities around them. If you’d like to experience this for yourself and your family, then get more information about Jerry Fetta and Wealth DynamX by going to Membership.JerryFetta.com
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