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