Stock Market Selloff: Are You Prepared for A Global RECESSION?

Hey everyone, welcome back to another edition of We're Talking Money. Today we're diving into a super important topic: the stock market's current downturn and why it matters to everyday investors, and really everyone. There's a reason behind every move when it comes to investing, so buckle up. We're going to unpack what's really going on with this market right now and what it means for your investments.

The Dow Jones Industrial Average lost more than a thousand points. The Dow, along with the NASDAQ and S&P 500, had their worst day in 2 years. Did you know that in just 4 weeks the S&P 500 has dropped nearly 10%, and a third of that came in one day? That's a wake-up call for all of us, especially if we're invested in the stock market.

So let's break down the challenges that we're facing. First, we have some pretty concerning economic indicators. Everyone knows that inflation has been the headline for a few years now, and yes, rates have declined, but that isn't the same thing as price decline. Inflation rates simply tell us that price increases have slowed. Prices are still high, however, relative to just a few years ago, and that's making everyone a bit uneasy. Why? Because the basics of living are so expensive.

And on top of that, we have geopolitical tensions. They're on the rise, which always puts a damper on investor confidence, and I think a lot of this is all about confidence. Then you have Warren Buffett. He sold $84 billion worth of his Apple stock. And then something called a carry trade that entered the picture last week. What the heck is that? Don't worry, I'll explain in just a minute. And of course, talks of recession. That never gets old, it seems. Oh, and by the way, we have a presidential election in just 90 days.

The volatility index, or the VIX indicator, spiked to levels that we haven't seen in four years. That's a long time. And consumer debt, it's setting new record highs every day. When you take all of these factors, put them in the cauldron, turn up the heat, you are bound to get an unsatisfying outcome, perhaps a perfect storm even. And all of this has a lot of investors, probably you, scratching their heads about where to put their money.

Now let's dig a little deeper into what's causing this decline and the likelihood of things getting better or worse. The single largest factor that we all can understand, it's inflation reaching 40-year highs just a few years ago. The Federal Reserve stepped in and they hiked interest rates in a big way. Now, that led to higher borrowing cost, and that affected businesses and us, the consumer, eventually. Here we are with a slowing economy. Now, that's textbook in terms of execution. Was their timing optimal? Probably not.

Even with higher rates, our economy continued to do pretty well, and stock prices, they were stratospheric. They went up, up, up, and that has continued until recently. But remember, what goes up must come down. Now the Fed is talking about lowering interest rates. The talking heads literally from everywhere are screaming in the microphone, "The Fed is too late and we need an emergency rate reduction." You get the idea of what I'm saying, but any of those knee-jerk reactions at this point, that would not be good.

And of course, the Fed, every time they speak, they're giving us reason to believe that they've somehow engineered a soft landing. Now, that term is ambiguous at best, and that's because no one really knows what a soft landing means, since our country has never had a smooth or soft landing. I don't believe this so-called soft landing is very likely. Whether I'm right or not, that has nothing to do with it. What you need to know is our Federal Reserve, they don't lower rates to avoid a recession. They lower them to get us out of recession and to ignite growth and to make money cheaper to borrow, which means an economy can get going again.

You're probably asking, are we in a recession? Well, the data is pretty confusing, but there's several indicators that suggest we are. Unemployment, for example, climbed to 4.3%, and something called the Sahm rule just triggered. Now, what's the Sahm rule? Well, basically it's a recession indicator that signals when the three-month moving average of the US unemployment rate is half a percentage point or more above the lowest three-month moving average unemployment rate over the previous 12 months. Looking back 50 years, and full disclosure, the Sahm rule hasn't been around for 50 years, but if it had, its accuracy was perfect.

And then you have Warren Buffett selling half of Berkshire Hathaway's Apple stock. That was an $84 billion transaction. This is a guy who is known for buying, buying and holding, not selling. What's going on?

Then you have the Japanese market selloff. On Monday the selling began in Japan, where the Nikkei had its worst day since Black Monday 1987. What does Japan have to do with the US stock market? Well, keep in mind we're a global economy and everyone is linked. Actions in one area of the world, it will affect others. In this case, Japan rarely raises its interest rates, but last week it did so for the second time in just 17 years. What's the big deal? Well, raising rates effectively cuts their money supply, and that increases the value of the underlying currency against other currencies.

Now, this seemingly innocuous move by the Bank of Japan to help reduce their cost of imported goods was not so innocuous after all. It caused a mass unwinding of something called a carry trade. Here's how that works. Carry trades involve borrowing money at low cost in one currency to achieve higher returns from investments in another currency. That's just classic arbitrage. One of the most recent examples, it's borrowing the Japanese yen, expecting the currency to remain cheap, and that's because of their 0% interest rates that have been in place for a long time. Now, those borrowed funds would then be invested into the US, say Treasury bonds, US stocks, things that are anticipated to deliver a higher return. And we know that bonds are doing just that. So are stocks.

The circumstance became a reality, however, when Bank of Japan raised its rates and they increased the borrowing cost. That sent us traders scrambling to sell their higher-risk dollar-denominated assets to cover these suddenly higher borrowing cost. Hedge funds added to the frenzy, and individual investors piled on, and that ultimately created a panic selling environment of all types of risk-on assets.

And this disruptor may not be over. I hate to say that, but the gap between the main interest rate in Japan now of 25 basis points after their raise and the Federal Reserve's benchmark rate of 5 and a/ qu% to 5 1/2% is likely to narrow. Why? Because our Federal Reserve is about to cut rates at their next meeting in September, and Japan may continue raising their rates. This is likely to continue this carry trade cover, and that, my friends, is no good.

How much more damage can be done? Well, from our perspective, we think there is at least a 25% stock market correction in the cards. Based on what we see, that is a possible outcome. Now, whenever something of this magnitude breaks, things can get ugly fast. The ripple effect begins with larger traders, institutional traders, and it goes all the way down to individual investors. And when people start getting nervous, they tend to pull out of stocks, and that exacerbates this downward spiral, and it's really hard to stop. That's what we saw last week, and that selling continued on Monday, August 5th.

What does this mean for the future of our stock market? The experts, I can tell you, are pretty divided. Some are predicting a bounce back as companies are adjusting or will adjust to this new landscape, but others, they're still throwing out a warning that we have not seen the worst of what we just dealt with. There are historical parallels, and those can give us some insight, but remember, that doesn't mean that we'll get a repeat of what's happened. Think about market crashes like 2008. It may not be that bad, or it could be worse. But remember this: we don't have a playbook for the current landscape. This is a tense time, and what I can tell you is staying informed is crucial.

Now, we've covered a lot today, from the alarming drop in major indices to the manifold factors driving this market decline. I want to give you a few tips on how you can prepare for what is potentially coming. Don't forget that corrections are natural parts of the market. They're natural parts of investing and business cycles. Markets have been vulnerable for a long time now, and the recent selloff, it's probably just typical of a blowoff that occurs every couple of years, despite the averages. You can do a few things to stay ahead.

Number one, stay calm. Don't panic. A strategy never includes panic or making rash decisions. Number two, review your reasons for investing in the first place. If those have changed, your strategy must change. Number three, remember, in investing it is a long-term commitment. If you're not in it for the long haul, you're probably going to get hurt. In fact, if you're in it for the short haul, you should expect to be hurt.

Number four is rotate your portfolio as economic conditions change. Things that look favorable to us in this environment include health care, financials, utilities, even emerging markets. We think they could be priced for some good upside. Number five, keep some cash on the sidelines. You need that for emergencies so that you don't sell out of your portfolio when things are down. You also need it for buying opportunities. When markets fall, buying at lower prices can always benefit you when the market recovers. Your benefit is that you recover much faster.

And number six, don't immediately buy dip. I know in some cases this works, and I know that every time we have a market pullback, the pundits come out and tell you buy the dip. I believe in this case patience will pay off. And lastly, for signs of how this financial market will be affected, pay close attention to the Bank of Japan and their moves on interest rates. I believe that'll tell us a lot of what we need to know in coming weeks and months.

Now I want to turn it to you. I'd love to hear your thoughts. What are you thinking about this current market? Are you worried, or are you optimistic? Drop your comments below and I'll do my best to respond to all of them. And if you found this video helpful, please subscribe to our channel and hit that thumbs up button. That means the world to me, and it helps our channel in such a great way. Thanks for supporting and for watching, and I'll see you next time on We're Talking Money.