⚠️ TRILLIONS LOST? The Fed Just Crashed Growth Stocks

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If you're not familiar with Jerome Powell or quantitative easing,
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let me give you a quick rundown of what's going on. Then I'll talk about what this means for us,
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as growth oriented investors who follow ARK Invest and the Metaverse Index
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and emerging markets, and so on. Then I'll tell you exactly what I'm watching out for and
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what I'm buying moving forward. Your time is valuable, so here's a quick summary up front:
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the Federal Reserve is stopping the money printer completely over the next 4 months
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and is now expecting to raise interest rates several times over the next few years.
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Research shows this could be even worse for growth stocks than we expect. Either way, in the short
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to medium term, growth stocks in general and probably fintech stocks specifically are going
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keep going down in price because they just got riskier. Since these growth stocks just got
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riskier, I'm going to diversify my holdings a little more, both in terms of stocks and
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in terms of other assets and I'll talk about exactly which ones. If you've got places to be,
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that's the high-level overview. For those of you sticking around, let's get into the details.
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As Jerome Powell said in that clip, the Federal Reserve has two goals: maximize employment
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and keep prices stable. Right now, inflation is near a 30 year high. So, while lowering interest
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rates and quantitative easing helped with maximum employment, it also caused prices to rise.
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A lot. If you don't know what quantitative easing is, it's actually where the Federal
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Reserve increases the money supply to encourage borrowing and investing by buying bonds on the
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open market. So, when you hear big news channels talking about “tapering” or the winding down of
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pandemic support, that's the Federal Reserve slowing down how many bonds they're buying until
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they're no longer buying any bonds at all, which they expect to happen in March of next year.
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Once that “money printing” hits zero, the Fed can begin raising the federal funds rate, which
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is also called the overnight lending rate. The federal funds rate is the interest rate that banks
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charge each other when they borrow money, which in turn determines the short-term interest rates
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that banks and other lenders charge companies and individuals to borrow that money from
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them. Currently, that lending rate is close to zero, which is great for growth stocks. Here's
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the issue. Back in September, most Federal Reserve Officials agreed that this federal
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funds rate will stay under 0.5% by the end of next year and around 1% by the end of 2023. As of this
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last Fed meeting on December 15th, those estimates essentially doubled to roughly a 1% federal funds
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rate by the end of 2022 and as high as 2% or more by the end of 2023. We should also consider the
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possibility that the Fed could decide to raise this rate even higher if inflation data pushes
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them in that direction. For example, Goldman Sachs Global Investment Research expects the
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overnight lending rate to rise even faster through 2024 and reach over 2.5% in 2025. So, according to
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them, the market needs to price in even MORE pain for growth stocks than it has been.
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Let's stay on topic for now and I'll get back to this when I talk about the stocks I'm watching.
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Rising interest rates are bad for growth companies because it now costs them more to borrow money
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which they'll sometimes do to reinvest into their growth. It's even worse for younger Fintech
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companies who are trying to acquire customers as cheaply as possible since now they have to charge
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those customers more money for loans and lines of credit. That could slow their overall growth.
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Yet another issue is when interests rates rise, bond prices usually fall, making them much more
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attractive investments. When bonds get cheaper, risky growth stocks look riskier, since they have
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to provide an even bigger return to outperform bonds. So, these rising interest rates can be
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a real triple-whammy for growth stocks, which is why ARK Invest's funds are so sensitive to them
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and why they've been underperforming the market all year. As a result,
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I expect two things. First, I expect growth stocks to keep going down for a while.
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I know. You're shocked. The other thing I expect is that they'll also get more volatile,
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which will cause a lot of investors to panic sell stocks they don't have high-conviction in. Just
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look at Tesla, which is ARK Invest's number one holding. Maybe it's yours too. Yes,
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Tesla is down by over 20% over the last couple months, but look at how it got there. Volatility
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is way up because the market literally cannot agree on Tesla's value. Is it a tech giant? Is
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it growth company? At almost a trillion-dollar market cap, can it somehow be both?
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If so, what exactly do these rising interest rates mean for Tesla as a result? The overall
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market is confused on Tesla right now, so its share price looks like a literal rollercoaster.
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Here's my honest advice. If rollercoasters aren't for you, don't get on the ride. There's
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no shame in staying on the sidelines until YOU are ready. You also don't have to put ALL of
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your money into these very volatile stocks if that's not for you. And if it IS for you,
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you can still choose to average that money in over time instead of getting on the ride
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all at once. Even though it's not always easy, averaging in is actually the simplest form of good
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risk management. Diversifying your holdings is another form of good risk management.
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Here's an example of a great little micro-portfolio of just four holdings:
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Tesla, Palantir, the Grayscale Bitcoin Trust, and SPY, which tracks the S&P 500.
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In just 3 positions, you've got exposure to the bleeding edge of artificial intelligence,
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energy storage, robotics, enterprise software in a wide variety of markets, and a cryptocurrency
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that more and more institutions are starting to put on their balance sheet. Then, you can use
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the S&P500 as a hedge and lower the volatility of this little portfolio, all while still getting
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some very reasonable returns. If you're keeping up with my portfolio project,
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you're seeing me do this exact same thing, except I'm holding Ethereum and Bitcoin instead of GBTC
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and I'm holding Google and Facebook instead of the entire S&P500. The less confident you are
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in picking individual stocks like Tesla and Palantir, the more you can consider putting
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into SPY until you clarify your position on your individual companies. It's not all-or-nothing.
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What's that? You have a life with more important things to do than reading investor presentations
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all day? Heh. Yeah. Me too. [shifty eyes]. That's where fund managers like Cathie Wood
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and Matthew Ball come in. I'm not a financial advisor or professional money manager,
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but they are. So I could take something like 5 or 10% of my money and put it in ARKK, which is
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Cathie Wood's flagship innovation fund, or META, which tracks Matthew Ball's Metaverse Index.
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By doing that, I've actually diversified the investing behavior that influences my returns
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altogether, since a separate person would be managing some of my money. I would also gain
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exposure to some new areas of technology, like genomics in ARKK and semiconductors in META, all
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without compromising on my personal investment philosophy. I know what I hold and if I don't,
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I at least understand why these fund managers hold things at a high level. Why is that important?
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Because that's exactly how you get the conviction to hold these things as they drop 10, 20,
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30%, or more in the first place, let alone buy more as they crash.
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Here's the thing. When the Fed raises interest rates, all growth stocks are affected,
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regardless of who is managing them. So, another way to protect yourself from volatility is to
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invest in assets that aren't correlated to the stock market. I already mentioned one example,
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which is cryptocurrencies like Ethereum and Bitcoin, or even the Grayscale Bitcoin Trust
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which trades like a stock but tracks the price of Bitcoin. Another example would be real estate,
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which is how YouTubers like Graham Stephan, Meet Kevin, and even Steven Mark Ryan got their
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start. They can go for the more volatile kinds of growth stocks because they've spread their overall
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financial risk across different asset classes like real estate and crypto. If I'm right
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about growth stocks getting more volatile in the near future, I think assets that don't move the
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same way as them should become more attractive as investments. Well, not everyone can afford
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a mortgage and not everyone is comfortable with crypto or interested in pokemon cards,
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so how can we invest in assets that aren't correlated to the stock market?
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I actually spent a lot of time digging into this and the partner for today's video is a
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great way to do just that. Masterworks dot IO is the only platform that lets you invest
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in physical multi-million dollar paintings without breaking the bank.
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Before I learned about Masterworks dot IO, I thought investing in art was only for the
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super-wealthy, but I was wrong. I like Masterworks because, according to a recent report by Citibank,
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fine art had the lowest correlation to the stock market of any major asset class, and
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that's exactly what we're looking for as interest rates rise and growth stocks continue to fall.
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Also according to Citi, contemporary art pieces have almost tripled the S&P500's total return
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from 1995 to 2020. That's why billionaire art collectors allocate between 10 and
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30% of their overall portfolios to art. That's way more than you thought, right?
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The other thing I really like about Masterworks is that they're really focused on the investment,
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not just the art. Their team of analysts use proprietary data to identify artists whose work
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would produce the best risk-adjusted returns. Then, they acquire paintings by these artists,
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file the artwork with the SEC, and then securitize it, meaning regular people like us
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can buy shares of the artwork as if it were a stock. These aren't no-name artists drawing
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animals on digital coins. In 2020, investors saw a 32% net return on their sale of Banksy’s
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Mona Lisa. That’s two times better than the S & P 500. They also just got a brand new painting
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by Pablo Picasso. Masterworks dot IO is disrupting one of the most exclusive asset classes in history
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by giving everyone frictionless access to artists like Banksy and Picasso,
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instead of just the ultra-wealthy. That's why I partnered with them. I think the reason
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Masterworks has such a long waitlist is that they make something that used to be impossible
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so easy. You go to Masterworks dot I O, create an account, browse their artwork, and can instantly
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diversify your portfolio with one of the oldest and most stable assets around. So,
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I reached out to them and they're giving you VIP access to their latest offerings, including that
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new Picasso painting. I'll leave a link to that offer for you in the description below.
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Great. We've covered the Fed working toward raising interest rates, the effects those interest
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rates have on growth stocks, the potential increase in volatility of those growth stocks, and
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ways to manage our risk accordingly, both inside our portfolio and out. Now let's bring it all
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together and talk about specific stocks. This Goldman Sachs Forecast is really changing my 5
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year outlook on growth stocks. If Goldman Sachs is right, the stock market is really only pricing
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in about half the pain it should be from these future changes in interest rates. This is where
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all the research that went into this episode comes together. There are two specific types of stocks
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that I think are are becoming much more attractive right now, neither of which should be surprising.
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The first kind are the mega-cap tech companies we all know and love today. Specifically, Google and
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Microsoft. In addition to being big innovators in many different markets with fairly diversified
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income streams, these companies all have high amounts of stable free cash flow and large cash
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reserves on their balance sheets, so they don't really need to borrow as much money to grow.
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Here's what makes these 2 companies special among the other tech giants like Facebook and Amazon,
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as well as Nvidia and Tesla. They're much lower volatility. Microsoft has a beta of 0.87,
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meaning it's even less volatile than the overall market. A beta of 1 would mean a stock is just
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as volatile as the S&P500 over the last 3 years. Google has a beta of 1.07, so its price is also
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very stable. This is a catch 22 because Google and Microsoft are big parts of the S&P500,
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so they're defining the beta for the market. But if you're already investing in the market,
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you might as well pick the technology innovators driving its baseline performance, not just its
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measure of risk. Those are the reasons Google and Microsoft stand out from the rest, at least to me.
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Google and Facebook are already in my portfolio and I'm thinking about adding Microsoft as well.
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The other kinds of stocks I think are going to be great are the ones that are being mistaken
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for Fintech stocks buuuuut they're not. For example, Sea Limited has 3 business units: Garena,
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their online game development and publishing arm, Shopee, which is their big e-commerce marketplace,
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and Sea Money, which is their digital wallet and payments solution. It's easy to look at Sea
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Limited, say two out of three of their business units get hit by these interest rates, and write
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them off as a Fintech company. Even though Shopee and Sea Money are quickly growing and exciting to
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follow, all of actual their operating income comes from Garena, which is digital entertainment. This
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is kind of like mistaking Tesla for an insurance company because Tesla insurance is a thing. I'm
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not saying that this hundred billion dollar market cap company, which headquartered in Singapore and
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makes most of its money through gaming, shouldn't be affected by these raising interest rates. I'm
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just saying that maybe it shouldn't be as effected as Paypal and Square have been. I WOULD start a
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position in Sea Limited, except it's already my number one position by a very large amount. So,
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I'm watching out for more companies that the market appears to be mistaking for a small cap
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fintech company when in reality they're something else. I'll keep you posted if I find more.
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So, there you have it. Comment below or tweet me at Ticker Symbol
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YOU with your thoughts on inflation, on volatility,
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and on risk. Are you worried about the future of some of your favorite companies?
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How far out are you thinking? Do you often think about your overall portfolio, including assets
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outside of the stock market, or are you just looking for new stocks now that interest rates
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are going to change? I read all my comments and tweets and I'm excited to hear your thoughts.
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And if you want to be updated as soon as I make an investment decision instead of waiting
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for me to make a video about it, consider joining my highest-tier Patrons on Patreon
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or Channel Members right here on YouTube. Those supporters are getting a lot of extra
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content each week as growth stocks keep trending downwards. If seeing me lose a ton of money
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every day isn't really your thing, no worries, I totally get it. I talk about my portfolio
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and its holdings here pretty often, whether they go up or down. [and it's gone]
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Either way, I hope this episode helped you understand what's going
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on with the Federal Reserve, what their updated policy means for growth stocks,
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and gave you ideas for how to manage your risk inside your stock portfolio as well as outside of
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it. Thanks for watching and until next time, this is Ticker Symbol YOU. My name
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is Alex, reminding you, that the best investment you can make… is in you.