THE FED IS BAILING OUT THE STOCK MARKET

In this video we go over one of the big reasons why the stock market is up by so much (in 2020) and that is the federal reserve. They've been printing a lot of money, keeping interest rates low and buying junk bonds which is propping the market up...

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If you take a look at the stock market over the past couple of months it has been on an absolute tear. I mean in just over 3 months the stock market has increased by over 40%, now getting close to all time stock market highs. However if we take a look at the economy it’s doing completely the opposite. It contracted at a 5.0% annualized rate in the first quarter of 2020, the sharpest speed of decline in GDP since the 2008 Great Recession.

So the real question we should be asking, is hang on, why is the stock market increasing by so much. Surely it should behave similar to what it normally does, which is close to the economy. It’s almost as if this increase is a little bit artificial. As if something is propping it up. And that’s because it is. There’s this weird force which I’m sure you’ve all heard of, that has a big set of cards in what happens to the stock market. And of course, I’m talking about the FED!

For those who don’t know the FED has been making some very interesting moves, which as we can see now has had a massive effect on the stock market…

One of those interesting moves, is it’s made an unprecedented decision to buy junk bonds from corporations.

Let me explain this. You see during this particular illness, lockdown weird situations that we’re in. A lot of the weaker companies are struggling. And by weaker generally I mean those who were not prepared. You know when it comes to personal finance, Dave Ramsey always recommends having a safety net of cash in place, and other things to make sure you’re ready for when times get tough.
But this is even more important for big companies. You need to have you balance sheet ready. You need to have enough cash saved at your disposal, just in case there’s a downturn which often happens.

Now we’ve recently seen one of those downturns, and we still are in one, when you look at the economy. The IMF Says the US Economy Will Drop 6.6% in 2020.

Now often what happens in these times, is those bad companies who don’t manage themselves well go out of business. Normally they run out of money, they try and issue debt, but no one wants to buy their debt. By the issuing debt just means, saying can I have some money, then I will pay you back with interest at a later date.

But, when you’re a bad company most investors won’t buy your debt. The likes of Warren Buffett, they’ll look at it and think, hang there’s a good chance you won’t pay me back. Even if you give me a good interest, I’m not buying it…

And then what happens is those companies go out of business.
Except when uncle Sam decides to step in. And by Uncle Sam I actually mean uncle Jerome Powell with his infinite money printer. He comes and he says no worries, you need some money, we’ll buy your junk bonds, we can just print more money anyway. This is a move, that we have never seen before by the FED, where they have chosen to buy junk bonds.

So normally the fed is not afraid to buy traditional bonds, and that’s fair enough. But junk bonds, may be a step too far. For those who don’t know let’s just say that traditional bonds are kind of like betting that the Lakers will win their game. Junk bonds are like betting that the Timberwolves, or the pelicans will win. Ah it’s pretty touch and go.

So you’re getting companies that normally wouldn’t be getting this money, but because of Uncle Jerome they are… The Federal Reserve stepped in with a $750 billion program to prop up the corporate debt market, and this is a big reason behind why the stock market is up by so much. Big companies getting essentially free money, because of very low interest rates.

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DISCLAIMER: It's important to note that I am not a financial adviser and you should do your own research when picking stocks to invest in. These are just some of my viewpoints, by no means would I recommend watching one YouTube video and then immediately buying that stock. This video was made for educational and entertainment purposes only. Consult your financial adviser.