- Stocks are real assets depending if the businesses are real or fake
- Stocks will continue to fall due to a huge bubble that has not completely popped
- Cheap debt and quantitative easing from the Federal Reserve allowed the stocks to rise to unprecedented prices
- Continue to keep the best stocks, but sell undesirable stocks
- Cash will be king to buy stocks especially when they get closer to the bottom
- Stocks with strong businesses who were beaten down may be a good time to buy now
I see stocks not as fake assets but as real assets. Many real estate investors mistakenly believe stocks are not real assets. I am not one of those real estate investors. Stocks are powerful assets. A stock is a portion of a business. Essentially when you buy a stock, you are buying a piece of business. The business of a particular stock can be fake or real. Many investors become wealthy from stocks alone, although I believe in a diversified portfolio with multiple assets.
What is the S&P 500?
S&P 500 is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. Not all stocks follow the S&P 500 and each stock very much different from each other. Most stock values have dropped. Some stock values have not fallen with few stock values that have actually risen!
Figure 1: S&P 500 fell over 30% since the end of February 2020 to March 2020. Gains from 2017 to 2020 were lost.
The S&P 500 bubble was created from human emotions and Federal Reserve monetary policy. The Federal Reserve’s monetary policy involves cheap public debt and quantitative easing. Quantitative Easing is a central bank that buys predetermined amounts of government bonds or other financial assets in order to add money directly into the economy. The cheap debt was accumulated by the public due to the government’s low Federal discount rate. The Federal Reserve discount rate is how much the U.S. central bank charges its member banks to borrow from its discount window to maintain the reserve it requires.
Why will stocks continue to fall?
COVID-19 has stricken the global world. The S&P 500 fell over 30% in the last few weeks. The economy is on a pause with many businesses forced to shut down especially hitting the airline and tourism industries. Restaurants, gyms, theaters, and events are all now closed and discouraged by the government. 3.2 million Americans have lost their job and filed for unemployment. This is just the beginning of the United States recession, just wait until May! Trump administration extended Social Distancing Guidelines to April 30 and expects up to 200,000 Americans to die even with Social Distancing Guidelines.
Figure 2: The S&P fell over 30%, then rallies with an increase of around 7%.
Cheap public debt, Quantitative easing (QE), and human emotions have created a huge bubble in the stock market. Even with a 30% decrease in stock values, the bubble is still huge and must continue to fall. Current emotions have not taken account of future events like the continued quarantine and mass unemployment. Once more hospitals are overloaded and the economy continues to be in pause, stocks will fall due to human emotions. COVID-19 pandemic is not going anywhere and emotions will get worse before they get better. I expect another 25%+ drop in stocks.
Figure 3: Stocks are much overpriced due to human emotions, cheap debt, and quantitative easing.
Figure 4: Past recessions show fake rallies where stock values increased before falling again.
Do not panic sell stocks. Always continue to keep the best stocks, but sell stocks that are not that great!
➡️If you bought the stocks before 2017, you should highly likely sell since you will make a PROFIT (this is a generalization based on the S&P index and will be very different for many stocks). Basically, if you got the stock much cheaper than what it is worth now, I would sell.
➡️If stocks represent a strong recession-proof business, I would not sell especially if you do not make a profit.
➡️If stocks do not represent a strong recession-proof business, you should sell if you can make a profit. If you can not make a profit, keep the stock.
➡️If stocks represent a business that has a high probability of going out of business, then sell no matter what even at a loss! Calculate the risk and decide to stay in or not.
Figure 5: Walamrt Inc. barely took a hit in stock values and is considered a recession-proof stock.
Take into consideration capital gain taxes, tax strategies, and asset allocation when selling stocks. No point in selling great stocks if you do not know what to do with the capital gains, either to increase or protect your Net Worth during a recession.
When should you start buying Stocks or Assets again?
The answer heavily depends on what your portfolio consists of. If you need to buy recession-proof stocks that are strong businesses to diversify your portfolio, the time is now. If you want to buy some discount stocks of real businesses that were hit by COVID-19 pandemic, the time is now. The absolutely best time to buy stocks will be at the bottom. You do not have to predict exactly when the bottom is! Buy when you believe stocks will not go down anymore and has a high likely chance to increase. That’s when human emotions are typically at the lowest and only good news can come after. I highly recommend diversifying a portfolio with real estate, gold, commodities, bonds, and stocks. Like stocks, many assets will be in a discount within a few months once the United States is deeper into the recession. The best time to buy is at the bottom of the recession, near the Trough phase.
Figure 6: The United States economy is transitioning from Peak into the Recession. The United States recession will not be weeks but months! Buy assets at the bottom, basically when closer to the Trough.
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