Mentioned in Video:

⚠️ The Federal Reserve and Jerome Powell are signaling that members are concerned about #inflation and willing to taper quantitative easing if it continues to rise. This, along with news of the pandemic could lead to a serious #correction in growth stocks (e.g. TSLA and PLTR stock) over the next 3-9 months, depending on how tapering policies are affected. Here's what I'm doing to prepare for a stock market crash: increasing my cash position, my “cash-like” positions, and watching a few key indicators to stay informed.

Video Transcript:



00:00
If you're a fan of growth stocks, the stock market is about to get very rocky.
00:04
The federal reserve is talking about raising interest rates over the next several months,
00:08
while the World Health Organization is talking about a new pandemic variant of concern, called
00:12
Omicron.
00:13
In my opinion, we're about to enter a big tug of war [squid game clip].
00:16
On one side, we have inflation pushing growth stocks down, which happens because their risk
00:20
to reward ratio goes up when bonds offer better returns.
00:21
On the other side, we have another round of the pandemic which forces companies and individuals
00:25
to move more of their routines online and adopt new technologies as a result.
00:30
So in this episode, I'll tell you exactly what I'm watching out for, how I'm preparing
00:34
in my own portfolio, and how you can do the same.
00:38
Your time is valuable so timestamps are enabled for your convenience and we can get right
00:44
into it.
00:45
The first thing I'm watching is the Federal Reserve's plan to taper their quantitative
00:49
easing program.
00:50
If you don't know what quantitative easing is, it's this [money printer gif].
00:57
Quantitative easing is actually where the Federal Reserve increases the money supply
01:00
to encourage investing and borrowing by buying bonds on the open market.
01:05
So, when you hear big news channels talking about tapering, what they're talking about
01:09
is the Federal Reserve slowing down how many bonds they're buying month over month until
01:14
they're no longer buying any bonds at all.
01:17
Once that happens, the Fed can begin raising the federal funds rate, which is also called
01:21
the overnight lending rate.
01:22
Currently, that rate is close to zero.
01:25
The federal funds rate is the interest rate that banks charge each other when they borrow
01:29
money, which in turn determines the short-term interest rates that banks and other lenders
01:34
charge companies and individuals to borrow that money from them.
01:38
Rising interest rates are bad for small-cap growth companies because it now costs them
01:42
more money to borrow money which they sometimes do to reinvest into their growth.
01:47
Also, when interests rates rise, bond prices usually fall relative to their returns, making
01:53
them much more attractive investments.
01:56
When that happens, risky growth stocks look riskier, since they have to provide an even
02:00
bigger return to outperform bonds that just got cheaper.
02:04
Inflation and interest rates are a real double-whammy for growth stocks, which is why ARK Invest's
02:09
funds are so sensitive to them and why they've been underperforming the market all year.
02:13
If you're looking to get rich quick, you are in the wrong place.
02:17
That said, I'm paying a lot of attention to how exactly the Fed plans on tapering and
02:22
when exactly they plan on raising the overnight interest rate as a result.
02:26
The Fed is buying $120 billion dollars worth of bonds per month, so if they begin tapering
02:32
that by $15 billion a month, it will take them 8 months to stop printing money.
02:38
That puts us around July 2022 IF the Federal Reserve keeps that pace of tapering the whole
02:44
time.
02:45
Based on comments from a number of Fed officials, market pros now expect the central bank to
02:50
discuss at the Dec. 14-15 meeting whether they should move even faster to end their
02:55
quantitative easing program, which would mean interest rates could start rising earlier
02:59
than July of next year.
03:01
The market isn't pricing that in right now, but I bet it will start to by, say, March.
03:07
Since we know this is going to happen by next summer, if not sooner, I'm going to get more
03:12
cash together than I normally would and slow down my buying in the immediate term unless
03:17
one of my favorite stocks dips very hard.
03:20
I'm looking at you, Stone stock.
03:22
Yeeesh.
03:23
I'm not a financial adviser and this is not financial advice, but in my opinion, you shouldn't
03:28
be afraid to keep cash and cash-like positions on the sidelines over the next few months.
03:34
What is a cash-like position, you ask?
03:35
I'll explain in a minute because this idea also has to do with the second thing I'm watching,
03:40
which is the pandemic's new Omicron Variant.
03:43
The World Health Organization assigned the greek letter Omicron to a newly identified
03:47
Covid variant in South Africa, previously referred to as the B 1 1 529 variant.
03:54
Here's what we know so far.
03:56
According to CNBC, the Omicron variant contains around 50 mutations, more than 30 of which
04:01
are in the spike protein, which is the part that lets it enter human cells and cause infection.
04:07
The issue here is that the spike protein is the target of most vaccines, so mutations
04:12
in that protein raise concerns that this variant may be less affected by vaccinated populations.
04:17
There are lots of things no one knows about this Omicron variant yet, including the full
04:22
impact of these mutations and how severe the symptoms could be for those infected.
04:27
I'm not here to tell you what the right government response should be or even if there should
04:31
be one.
04:32
What I AM suggesting is that we remember what happened to the stock market and the underlying
04:36
companies last time this happened.
04:38
Big market overreactions to headlines.
04:41
Travel restrictions.
04:42
Supply-chain issues.
04:44
Consumers stocking up on goods and capacity limits for in-person services experiences.
04:49
Think about what this could be mean for a stock like Disney.
04:51
Will it go down because of their theme parks or will it go up because of Disney plus and
04:56
their other online offerings?
04:58
What about all the companies that already grew a ton because of the lockdowns last time?
05:02
Do we really think they have room to grow that much again?
05:05
That's the tug of war I'm talking about.
05:07
I'm not saying I have the answer, but I am saying that asking these questions for every
05:11
stock you care about right now could pay off big time in the near future.
05:16
It's also important to understand what will be different this time, for example, the money
05:21
printer won't be going brrrrrr because of the whole tapering thing I just talked about.
05:27
Fintech stocks could get hurt twice: this new Omicron variant could make people tighten
05:32
their physical AND digital wallets, while interest rates rise making borrowing more
05:36
expensive and their stocks look riskier than they otherwise would.
05:40
Again, the idea is to spend more time thinking about the risks we're exposed to right now
05:45
and slowly correct them before the market corrects us.
05:48
There are a few things I think we can be watching to stay informed and make those corrections.
05:54
The things I'm watching for here are the CDC's responses to the mutations of this new variant
05:59
AND if the Fed changes their tapering plan at all for it.
06:02
For example, if Omicron ends up having a larger than expected impact this winter when it's
06:07
colder out, maybe the Fed will take a little longer to taper quantitative easing, buying
06:12
businesses a few more months of favorable borrowing conditions.
06:15
It could go the other way as well, where all the different mutations and variations of
06:20
Omicron don't amount to much and that emboldens the Fed to taper faster and raise interest
06:26
rates while the economy is strong.
06:28
Since I obviously have no idea what will actually happen, my plan is to build more cash, spend
06:34
it slower, and spend it on more cash-like positions.
06:37
Cash-like positions are companies that are less volatile because they're more predictable.
06:42
Think Apple, Microsoft, Facebook and Google and Amazon.
06:46
They're also companies that have high amounts of stable free cash flow and large cash reserves,
06:51
so they don't really need to borrow as much money to grow.
06:54
They're also pretty defensive stocks — are people going to use Google and Amazon less
06:59
if the Omicron variant ends up being a serious issue?
07:02
Or will people use them more?
07:04
This is actually one way that Cathie Wood uses big tech stocks to prepare for crashes
07:09
and corrections as well.
07:34
I actually made an entire episode about it called Cathie Wood Prepares for a Crash.
07:42
That episode talks about how ARK Invest's funds spread out among more cash-like holdings
07:47
in bull markets and concentrate down to their highest conviction stocks in bear markets.
07:54
I'll leave a link to that in the top right-hand corner of your screen right now and in the
07:58
description below as well.
08:00
So, here are a few things you can watch to keep a pulse on the market week by week.
08:05
I already talked about the Federal Reserve's proposed tapering rate, which is currently
08:08
set to be $15 billion dollars less per month.
08:10
A higher number than that means interest rates could raise sooner than July of next year.
08:14
A lower number extends that timeline.
08:17
I also talked about the Omicron variant, the number of mutations, and what that could mean
08:22
for businesses and keeping up to date on statistics that could give early warning signs for stocks
08:27
that rely on selling physical products versus online services versus in-person experiences.
08:33
Again, think Peloton versus Netflix versus Disney versus American Airlines.
08:38
The third thing you can track is the American Association of Individual Investor's Sentiment
08:43
Survey.
08:44
The AAII Sentiment Survey asks its members the same question each week: what direction
08:49
do they feel the stock market will be in the next 6 months?
08:52
If you want to be greedy when others are fearful and fearful when others are greedy, you first
08:57
have to know whether people are being fearful or greedy, right?
09:01
Lately, according to this survey, expectations have been getting less bullish and more bearish,
09:06
so people are getting more fearful.
09:09
The final thing I like to track is actually a little sneaky.
09:12
Like I mentioned, ARK Invest's funds spread out over more positions during a good market
09:16
for growth stocks and concentrate into fewer, higher-conviction positions during big dips,
09:22
especially when Tesla or Teladoc or Coinbase trade at steep discounts.
09:27
So, I track what I've been calling the Cathie Indicator, which is a count of the number
09:32
of stocks in each ARK Invest fund over time.
09:35
When this indicator is down, it means Cathie Wood is selling her cash-like positions and
09:40
buying her high conviction ones.
09:42
When it's up, she's building more cash and waiting for the next deal.
09:46
That's not me trying to time the market OR me telling you to go do the same thing.
09:51
It's just a good way to keep thinking about your own cash position, including any cash-like
09:55
stocks you're holding.
09:58
You can go to www.ark-funds.com, download the holdings for each fund daily, and keep
10:04
track of the number of positions over time.
10:07
When it comes to doing your own research, I always encourage investors to go straight
10:11
to the source.
10:12
If that sounds like too much work for you, no problem.
10:15
I made an absolutely free Google Spreadsheet that automatically updates with ARK Invest's
10:19
latest holdings every day.
10:21
That's an easy way to see all of their funds in one place and you can just write the number
10:25
of holdings down each day.
10:27
You can also see how much money Cathie Wood has in every stock across every fund she manages.
10:32
I'll leave a link to that ARK ETF Calculator for you in the description below as well.
10:37
Or, if you'd like to have access to a plot that tracks this number over time instead
10:41
of having to record it for yourself, my patrons on Patreon and channel members right here
10:46
on youtube have access to my Cathie Indicator dashboard, which I update myself, each day,
10:52
by hand.
10:53
Currently, that plot is showing that Cathie Wood concentrated ARK Invest's funds down
10:57
a bit through September and October and now they're holding steady.
11:01
I'll make an episode updating you on that as soon as I see it changing.
11:05
Sometimes, my supporters catch it even before I do.
11:08
If you're interested in those updates, consider investing in the like button and subscribing
11:13
to the channel with all notifications turned on.
11:15
No matter what you choose to do, I hope this episode helped you understand a little more
11:20
about the Federal Reserve's plans for tapering, the latest news on the pandemic, how they
11:25
each might affect the prices of growth stocks over the next few quarters, and how you can
11:30
start preparing today.
11:32
After all, this is the channel that invests in you.
11:35
Thanks for watching and until next time, this is Ticker Symbol YOU.
11:39
My name is Alex, reminding you, that the best investment you can make… is in you.

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Alex Divinsky

💰 Investing in our future through disruptive innovation, ☕ lover of coffee, 📺 host of Ticker Symbol: YOU on YouTube

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