Why The Stock Market Is Going ABSURD Be Warned!

So the stock market is making people lots of money. But our current economy paints a very different picture and some experts warn us we’re on the verge of a crash.

This situation seems completely absurd. It’s safe to say the stock market is unpredictable during the best of times, but things have really heated up recently.

With huge profits as well as huge losses becoming more and more common, it can be scary, especially for the new investors when they witness one of their stocks crash by 50% or even, on the flip side, go all the way to the moon as they may fumble the bag and miss their opportunity to sell.

That’s why today, I thought it was important to break down the reasons behind the stock market’s somewhat absurd behavior.

Being aware of the information we’re going to be discussing today will put you in a much better position to make smart investments and, hopefully, a lot more money.

I told those people that ask if I say that on purpose, of course, I do. First, we need to address Momentum Investing. Imagine putting $100 into a stock and watching it multiply by thousands in a matter of a few days. Well, that’s what Momentum Investing is all about.

The rise of momentum stocks has most certainly made a lot of people rich over the past year or so, but it’s also broken the bank for many others.

This usually happens when a bunch of retail investors get behind a stock and collectively agree to buy and hold. I think of it a bit like when you start to push a small snowball down a hill.

This is most effective when the hedge funds are betting against the stock as it forces them to cover their losses, which in turn causes the stock to rise in price. This is like when the snowball picks up all the snow that’s been laid in its path and starts growing at an astonishing rate. This is all due to the power of momentum.

And in order for a situation like this to get started, it does require that initial push from investors and the right market conditions. After all, you can’t make a snowball if there’s no snow.

Momentum Investing is becoming more popular in part because of how easy it is to invest these days. When I started investing, I had to call up my stock broker and ask him to place a trade. It was so inconvenient. He never even used to get my name right. Now, it’s as simple as logging onto an app.

I honestly wish I had access to these investing platforms when I was younger as they give the normal person the power to grow their money over time. Previously, this luxury was only awarded to the rich. So the ability to invest with ease has definitely contributed to the absurdness of the stock market.

However, I don’t think this is the only cause. I’ve definitely noticed a shift in how people approach investing after experiencing the cryptocurrency market.

People have been so exposed to huge returns that making an average of eight to 10% yearly from the stock market is almost laughable. However, most crypto coins are driven by hype and not real-world value like stocks.

And now, people are even starting to invest in this way when it comes to the stock market. I wish I’d been invested in SHIBA INU before the one month pump of 950%.

I guess I’m more of a cat person now, is it? A great example of this is the company Digital World Acquisition. At one point, it saw its stock skyrocket 1000% due to investors’ excitement over its links with former president Donald Trump.

But this was driven by momentum and was highly unstable, resulting in a stock crashing in value. Personally, I feel like too many people piled into this stock with very little understanding as to what they were investing in, just because it was going to the moon.

It’s very important you’re able to tell the difference between a serious investment and a momentum stock. ’Cause if you make a mistake, it can lead to huge losses. I don’t have anything against Momentum Investing. However, personally, if I’m having a dabble in anything like this, I only use the money I’m prepared to lose.

I’m primarily focused on long-term investing and wealth building. And that’s why I’m a self-proclaimed index fund champion. Back in my day, I would never have bought a stock without doing my research.

But now, it definitely seems to be the norm. Now, we have to talk about the Tech Boom. Big tech giants are dominating our world, which could be masking the true state of the stock market.

Maybe it’s more fragile than it looks on the surface. Let’s be honest. It’s clear that some sectors have done a lot better than others. And if you are a tech investor, then you’re most likely doing very well.

FANG stocks, which is an acronym for Facebook, Amazon, Netflix, and Google have a clear advantage over traditional businesses. They have an extremely expendable workforce, which means they can keep their wages really low and they control one of the most valuable assets in the world, which is data.

My fellow geeks have well and truly taken over the planet. Go get them boys! So tech stocks have had a great run over 2020 and 2021. However, the stocks that investors thought were going to bounce back just didn’t meet expectations.

I’m talking about the stocks that were hit hard during the pandemic as even now, lots of them haven’t recovered.

I’m talking about things like cruise ships and airlines. They just haven’t bounced back. In reality, you’d probably have just been better off buying and holding a simple S&P 500 index fund.

The S&P 500 keeps hitting all time highs, but this is mostly due to the high percentage of tech stocks boosting it up. This just goes to show that even if the stock market looks like it’s doing absurdly well, it can be very misleading.

Certain sectors could be dominating. The number of public companies in the USA is also nearly half since 1996 when there were 8,090, with there just being 4,397 public companies in 2018.

This means the stock market is becoming even more distanced from the overall economy as it doesn’t account for thousands of smaller private businesses that have been hit hard over the past couple of years.

I mean, the local bakery I used to buy my donuts from has gone out of business. How are the police gonna cope? The danger here is that you might be tempted to put all your money into tech stocks due to the recent performance.

However, if this sector gets hit hard then so will your portfolio. Just imagine a huge security weakness was exploited in FANG stocks by a group of hackers and their companies were crippled.

It’s highly unlikely, but it’s certainly something to consider when investing. I have always maintained a diversified portfolio of stocks over a variety of sectors due to this concern.

Now, it’s time to discuss something everyone likes. Free money! The FED is doing everything in their power to avoid another market collapse like in 2008.

Their strategy seemed to have been effective in the short term, but who knows if they’re just kicking problems further into the future. This is kind of the like when you drop something on the kitchen floor and instead of picking it up, you just sort of kick it under the fridge.

Come on, I know we’ve all done that before. As we’re all aware, during the pandemic, governments all over the world were given out free money in the form of stimulus checks and furlough payments.

A recent study showed that 46% of people that received this stimulus invested at least some of it and 70% of the 46% invested at least half of it. Wow, that was quite a mouthful. But the figures are amazing. And this is all extra money being put into the markets that didn’t previously exist.

These new investors are more likely to turn to momentum stocks as they want to make the most from their money. This led to 24% of investors admitting they didn’t understand what happened with the GameStop situation, even though they took part in it.

This new wave of inexperienced investors really does seem to have contributed to this absurd market. It’s almost like once something starts going up, everyone jumps on it and it just drives the price to absurd levels.

The fourth round of stimulus checks could be right around the corner and I’m extremely curious to see what happens next. On top of this, interest rates are still very low.

This means getting money at cheap prices is easier than ever. Of course, if you want a loan, you’ll have to be accepted and deal with all the usual complications, but it’s extremely appealing to borrow money at a low interest rate and invest it at an average return of eight to 10% and get free money.

And that eight to 10% is just an average. As we mentioned earlier, some stocks are achieving far in excess of these traditionally expected returns. With all these said, it’s important to remember that we’re living in very uncertain times and as stimulus starts to dry out, this can have an effect on the stock market.

The debt ceiling is the maximum amount of money the USA are allowed to borrow. And as you can see by this graph, the US are rapidly approaching a ceiling, which is worrying news and it’s definitely left a lot of people feeling spooked.

Taking out loans to invest is also a risky move. As when those interest rates increase, they can eat into your profits. Just imagine you’re making 3% on a stock and the interest rates rise to 4%.

You’d actually be losing more than you were making. So the big takeaway here is to avoid over leveraging yourself with too many loans and to appreciate that we’re in unique situation at the moment which won’t last forever.

This brings us perfectly on to the Stock Market Bubble. Imagine waking up tomorrow and seeing your investments have halved in value or even completely gone to zero.

Well, that’s the harsh reality of being in a bubble when it bursts. The thinking behind this is that the market can only survive on hope and momentum for so long.

Eventually, the stock price has to fall back to the true value of the company. I was only slightly affected by the dot-com bubble as I was able to recognize the signs and pull most of my money out before everything came crashing down.

Even billionaire Mark Cuban sees the similarities between the recent run-up in stocks and surge in day trading and the months before the dot-com crash.

This caused him to sell his company Broadcast.com to Yahoo for $5.7 billion just before the bubble burst. I think this is one of the best business moves ever as the site would have probably died along with businesses like pets.com.

The truth is some experts believe stocks are in for a decade plus of abysmal returns. Whereas others, like Cathie Wood, think a polar opposite of this and believe that due to the fear about being in a bubble, we’re not actually in one.

The reason for the inflated prices could be the increased demand caused by the pandemic. What I mean by this is during the pandemic, the demand for certain products was massively inflated.

I mean, who’d thought we’d ever run out of toilet paper? The same goes for the investing app Robinhood. During the pandemic, demand was increased for investing.

As we have discussed, people wanted to put their stimulus money to work. This created hyper demand, driving signups through the roof. Fast forward to late 2021 and the earnings report was extremely weak.

And because of this, the stock is suffering. That’s why it’s so important not to follow the herd mentality and pile into a stock while ignoring other factors that could be contributing to the inflated stock price.

The bottom line here is that some of us, like Cuban, made it out of last bubble like bandits while 99.9% of others didn’t.

So I think it’s safe to say the economy and the stock market aren’t the same thing. One is driven by logic while the other seems to be currently fueled by speculation. It’s always important to remember the stock market is a leading indicator that reflects where investors think our economy will be in the future.

Anything that affects this hope for the future will have an impact on the stock market. Now, personally, I don’t believe we’re in a bubble. However, I do think certain stocks are absurdly overvalued.

Just the other day, I made the really hard decision to sell half of my Tesla position at $1,088 as I just couldn’t justify holding all my stocks at that price.

I know I always say never to try and time the market, but I’m hoping for the stock to drop in the future so I can buy back more shares than before.

But as always, I won’t be touching the majority of my portfolio as that money is invested within index funds. I just consistently buy and hold these no matter what the market’s doing.

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