hey guys how's it going it's Andy from Magoo investing happy
Wednesday kind of forgot what day of the week was considering we did have a market holiday on
Monday in today's video I want to talk about this article that popped up on my feed from the motley
fool talking about four reasons why they think the stock market might crash relatively soon if this
video title seems kind of familiar it's because it is this has been a topic that's been talked
about on the motley fool specifically from this author for like the past like four months at this
point so it doesn't mean that it's going to happen anytime soon probably not but I always think it's
a good idea to go back and look at some of the potential catalysts that you identify to start a
potential stock market crash because everything's going to be going great until it isn't then
some of the things that have been propping up the stock market are going to go away and we are going
to see a major correction it's not if it's going to happen it's going to be when it happens and
am I saying it's going to be anytime soon no but I did want to give my explanation for four
reasons why this author thinks the stock market could crash relatively soon and let's talk about
some of the things I’m seeing with the overall stock market considering we are at all-time highs
I think we've hit seven all-time highs already in 2021 and as of right now I don't see that stopping
anytime soon the first thing that the author mentions in this article talks about valuation
of for the stock market has been messed up for a long time it's hard to look at the stock market
and argue that things are not overvalued at this point with the pandemic there's
been more of a focus on companies trading water instead of focusing on future growth
for example apple stock (AAPL Stock) has been up 80% in the past year which is fantastic everyone
makes money when the stock market's up the problem is when you look at it the earnings per share
was only up three percent and their revenue was only up 2.5% so usually when you look at a stock
the reason the stock goes up because the outlook of the company is better than what we've had in
the past and we haven't really seen that with the stock market so far in 2020 going into 2021
the expectations have changed and that's resulted in these ridiculous valuations for these companies
have not seen increases in the growth metrics that we see with revenue earnings per share net income
so things have not gotten better for these companies but we have had the valuations go up his
article talks about the schiller s p 500 p e ratio being a 35.6 and this is a very inflated number
it's not the highest it's been since the dot-com bubble and anytime you're comparing to one of the
largest bubble bursting in stock market history it's usually good to kind of pay attention to
why things like this are happening as I mentioned the pandemic is the main reason for that because
earnings have not been going up but the price has been expanding rapidly the current number
that it's at right now of 35.6 is double what the average has been for the past 150 years so yes
the stock market is very inflated when you look at it at a valuation standpoint but I’ve talked
about on this channel that I don't look at PE ratio as being this end-all-be-all determinant
of how valuable or if you're getting a good deal with a company because as of right now the stock
market is all about comparing to the expectations and I think that's you know it's interesting
but when you look at how the schiller p e ratio has reacted in the past four times it's happened
if something happens once you can call it an anomaly if it's two times you can connect a
trendline and you can make it a trend but the four times of the pe ratio for the schiller's
p e ratio has been above 30 the s p 500 has fallen between 20 and 89 percent am I saying
this is going to happen no one of the reasons why I think we might not see a correction like this
is one of these words that I swear if you looked at these search results for this term it's going
to be a ridiculous number that's unprecedented so considering this is not something that we've seen
before with a global pandemic affecting the stock market this much it's going to be hard to tell if
the stock market is going to react in the same way that it has the previous four times of being this
inflated so while I don't see pe ratios being a huge red flag it's very interesting to see what
investors are looking at to judge the value of a company because in the past you have always
been looking forward for evaluation the guidance and with the pandemic happening we haven't been
looking forward you've kind of been comparing to what stocks have done year over year and kind of
comparing to what it's done in the quarters during the pandemic so that's the first thing that they
mentioned in this article number two has to do with the emotions after the game stop fiasco
if you've been on this channel for the past couple weeks I’ve talked a lot about emotions because
emotions are one of the hardest things to teach when it comes to the overall stock market
you can learn all you can about when you should be entering one should be exiting stocks to find
the hardest part about investing the stock market has to do with selling I’ve talked about this in a
video recently the two hardest things in the stock market is one selling when you're winning because
usually has something like greed taking over but the hardest thing is selling when you're down
and with the GameStop fiasco we have a lot of new investors that have seen how quickly emotions can
change with the overall stock market you had GameStop as being the most popular stock to
talk about on places like twitter now we don't see that much of a talk anymore and it's mainly
stuck on places like wall street vets that are people that are still holding at this point so
if we do see it move to the downside I think it's very likely that we will see
a retail investor selling but as I mentioned retail traders are the most important than
they've ever been there was a point this past summer where I think 25% of all trading volume
was done by retail traders which is a crazy high number and yes at one point, 50% of all robin hood
accounts did own some shares of GameStop and that does result in a lot of movement when it
comes to something like a game stop deciding which direction that's going to go but when you look at
the overall market the average robinhood account is $2000 that is nowhere near what people are
moving with the institutional traders hedge funds stuff like that so yes emotions after the GameStop
fiasco are running high right now but we have some of the emotions that it's kind of this narrative
that the GameStop situation was all about these retail investors going against these hedge funds
in reality I talked about why I was expecting that we're going to see a lot of hedge funds coming
out and saying that they made a lot of money they usually try to go all in to try to burn the other
hedge funds that are maybe a little too risky when it comes to the overall market so panic
selling from new investors will not be that big of a trend but it is something to watch at all times
number three the author mentions the pandemic obviously the pandemic is what caused the
stock market crash at the beginning of 2020. but I’ve been trying to think about ways to kind of
compare what the market crash feels like for march of 2020 compared to what we have now and as of
right now I don't think that pandemic's that big of a deal to the overall stock mark and that seems
crazy to say because of how much people's lives have been impacted by the overall pandemic but the
pandemic was a huge catalyst we had no idea what was going on I think it's very similar to when you
think about iv crush when it comes to selling or buying options around an earnings report
the iv crush happens when you have uncertainty before a major event it could be a news story it
could be an earnings report it could be a merger before the news gets released you have all the
uncertainty of what's going to happen is it going to go up is it going to go down and that's the
reason why these options have so much value before the report comes out then the report comes out you
have better understanding of what's going on and the value doesn't matter as much and the stock
market kind of forgets what was going on with that stock and I feel like that's what's happening
when you talk about the overall pandemic the last big news referring to the pandemic happened when
the vaccine was first announced as being ready to go out to people in early November and as a result
the stock market shot up three percent and if you were around during the previous summer pretty much
every day was talked about do we have vaccine news coming yes fantastic market goes up has hasn't
been delayed or did not go well stock market goes down but now that we've gotten to the point where
the market doesn't really care about the overall pandemic this article talks about what if we have
this new variant that comes out and it's worse than the previous one what if we have poor rollout
we've already seen poor roll out and the stock market's up significantly already in 2021 so
as crazy as it sounds like I don't think the pandemic is going to play a big factor if the
stock market crashes because at this point the market is pretty used to how things are going
with the expectations of the overall market and especially the analyst expectations when it comes
to earnings but I think the most interesting thing to talk about has to do with stock buybacks which
is the fourth thing that the author mentions for a potential catalyst to start the stock market crash
I’ve made a couple videos in the past you're being very critical about companies and how they've
decided to spend their free cash flow and one of the places that companies are allowed to put their
free cash flow has to do with stock buybacks and you do have some very bad instances of companies
especially the airlines spending 96 of their free cash flow on stock buybacks in the past five years
why was this a problem for one it increases their debt as they use their assets to buy
back their share price but doesn't actually boost the overall the company in any way it
boosts the share price but it doesn't affect the product that they're putting out number two with
the pandemic companies like the airlines needed aid because they didn't have enough money to
pay their employees for this tough time and that's when they needed the bailouts
number three is you have the incentives for executives to boost the stock price because
if you're an executive and you can make a million dollar payout if the stock price stays above a
certain level yes there's going to be incentives for buying back stocks it does not help the
overall sense of the company and we saw that with the airlines where they spent 96 of their free
cash flow on stock buybacks they needed aid to get a bailout from the government and the second
that the lock-up for what they were required to do during that the agreement to the bailout they
started laying off people we saw 90,000 jobs from airlines get cut because these airlines
didn't have enough money but they did have enough money if they didn't use it on the stock buybacks
it's going to lead to a video I’m going to make all about this topic this weekend talking about
probably the biggest myth of the overall stock market it's something that I always seen talked
about is the reason why stock buybacks are such a beneficial thing and why they need to happen but
no they don't stock buybacks have surged in the past year part of it comes from the reduction
of the corporate tax rate under the trump administration the idea that trump said was that
it's going to put more money into the corporation's hands which is in turn going
to trickle down to the average family the numbers that the trump administration released expected
that around four thousand dollars per household was going to be given as a result of this tax cut
the problem is that trickle-down economics don't work and we know that for a fact now and
the numbers that I could find where do the benefits of the tax cuts go
it's not a shocker that it goes to the top twenty percent and it's not even
slightly a shocker to see that a lot of it goes to the one percent and the bottom twenty percent of
Americans the bottom forty percent does not get as much trigger down economics doesn't work at this
point there's been some talks that Biden is going to raise the corporate tax rate from 21 to 28% is
that a boost yeah but considering that it was at 35% under the Obama administration and when I put
up the chart of the corporate tax rate over the past 50 years it is incredibly low it's been going
down since 1980. that's resulted in great gains for the overall stock market which is fantastic
for investors like you and me these numbers are going to need to change at some point because
the things that you can do with free cash flow you can do stock buybacks you can pay out a dividend
you can hold on to it in cash or you can invest into yourself with research and development also
called r d the problem was in 2018 the year that the corporate tax cuts started and it was 2017
but we really didn't see the impact of until 2018. during that year only 43 of the s p 500 companies
had any type of research and development expense so only 43 are spending their free cash flow on
innovation and that was kind of the whole idea of the corporate tax cut was that they're going
to be spending more on innovation they're going to be helping their business to make that number
look even worse 38 out of the 500 companies makes up 75 of all the r d spending in 2018.
in comparison more than 80 of all the free cash flow went to investors during that year is that
a good thing for investors like you and me sure but are we seeing the innovation are we seeing
these companies come out with better products better earnings and moving into bigger markets
no we haven't and so that's been great for people that are involved in the stock market but it's
kind of increase the distribution of wealth that we've been seeing in America for so long because
the people that are involved in the stock market make a lot of money and we've the whole reason for
me making this channel is I wanted the lower people in the income bracket myself included
to get involved with the overall stock market that's why we've seen this huge spread of the
people have been able to take advantage from these tax cuts and the us is deeper in depth than it's
ever been stock buybacks are going down in 2020 but I expect to see that bounce back in 2021
what kind of the magnifying glasses pulled away from some of these companies that were holding
on to cash because either they got a bailout from the federal government or for the bank situation
they aren't allowed to do stock buybacks until a certain point because of the safety measures
that were put in place as a result of the financial crisis back in the late 2000s so
will any of these four reasons be the reason why the stock market crashes on its own
no most likely not it's going to take a lot more to happen we've seen the resilience of the
overall stock market and we've seen that the stock market does not represent how the overall economy
is doing and I think that's something that a lot of people need to understand am I protecting
myself by having a lot of my portfolio sitting in cash yes is it likely that the stock market is
going to continue to go up and I’m going to lose out on some pretty good gains as a result of that
yes I do think the stock market has to crash it's not a question of is the stock market's going to
crash it's when the stock market's going to crash so right now I’m protecting myself let me know
what you think is going to be needed to make the stock market crash in the comments section down
below thanks for watching I appreciate all support and I will see you in the next video