If you missed the financial news recently, let me summarize everything that has happened in
the last few weeks to find out if the market will keep crashing or it will finally recover.
Back at the end of February, when it seemed like the market won't crash further,
it kept falling! And right now, everyone is confused about whether they should
buy or wait till it keeps dipping more. Personally, I would love for it to keep falling,
but it seems like it won't because the fed got out on the 17th of March and clarified everything.
We will talk about what the fed said. What does that mean?
And How is it going to impact the stock market?
One of the metrics investors use to value companies is discounted
Cashflow. It can help us to understand where the market is overall headed to.
Without getting into a lot of details, I will explain what Discounted Cashflow is? How is
that related to what the federal reserve said? And will there be another crash?
Interest rates aren't just important because they make borrowing money cheap or expensive today
but also because they influence the value of future cash flow,
which is what investors are concerned about the most. You don't care about how much the company
is earning today or how much it has been earning in the past. What matters at the
end of the day is how much the company is going to earn in the future. Based on that,
you will decide whether you should invest in this or company or not.
Stocks always compete with other type of investments such as
bonds, cash, fixed deposits, whatever. Let's say you have a thousand dollars
in your pocket. Is it better to invest in the stock market? Bond
market? Or just keep it in your wallet? Obviously, investing is way better. Let's
say interest rates are 5 percent. So if you invest it in government bonds, your 1K dollars will worth
1005 dollars next year. So it's important to look at the time value of money.
The sooner you have the cash on your hands, the more it worth because,
the sooner you will invest it, a dollar today is worth more than a dollar tomorrow.
SO if the company is going to earn a billion-dollar five years from now.
It's not going to be billions because a billion dollars 5 years from now worth
less than a billion dollars worth today because you could invest it and get 5 percent at least.
So it's not enough to look at the company's future Cashflow.
"Oh, this is how much the company is going to earn in the next
3, 5, or 10 years." But you have to find the present value
of that future cash flow. How much that billion dollars 5 years from now worth today.
It sounds a bit complicated, but I will try my best to simply everything.
You can use this metric in the future to value other companies.
Of course, no one knows how much any company would earn in the future. It's all predictions, but
these predictions are based on multiple factors such as how the company is performing today,
where is it investing? What is their strategy? How is the business environment? What are the
chances that the company will hit its annual objectives? What is the political climate?
There are a lot of analysts who prepare a certain type of prediction.
Let's say hypothetically there is a company called Amazon, and it's expected that it will generate
100K dollars every year for the next three years. On the other side, interest rates are 5
percent, and they are expected to stay there for the next three years.
At that rate, a 100K dollar next year would worth $95,238. I got that number by dividing
the future cash flow, which is 100K dollars by (1+0.05)1 because the formula is CF/(1+r)year.
If we apply the same formula in the second and third year, these are numbers we are going.
Year 1 - $95,238
Year 2 - $90,702 Year 3 - $86,383
The company's future cash flow isn't 300K dollars as it seemed at first glance but
$272,323 dollars or the sum of these three numbers.
I told you it's not as complicated as it seems.
Here is when the interesting part starts, what happens if interest rates are lower?
What happens if the fed lowers interest rates to one percent? How will that impact the
projected future cash flow? Let's do the math
First-year - instead of $95,238, it's going to be $99,009.
When fed lowers interest rates, suddenly on paper, these companies are going to make more money even
though nothing absolutely changed for them. Let's do the second year and the third.
The Second-year will be $98,029 and the third - $97,059, which makes it a total sum of $294,097,
which is higher than the previous $272,323.
Remember, the most important thing that investors care about is how much the company
is going to earn in the future. That's why whenever the fed lowers interest rates,
stocks become much more attractive even if they are not going to borrow money.
This metric is even more important when it comes to tech stocks because most tech
companies are betting on making huge profits in the future, such as Tesla.
It's a great company, but it's barely profitable. But the idea behind it is that, in the future,
it's going to be super profitable. It's going to make a lot of money, but a dollar today worth
more than tomorrow, so when the fed lowers interest rates, tech stocks jump through the roof.
So since the end of February, when the stock market started falling,
everyone thought that's just a one-day thing. Honestly, I jumped in and bought some shares.
I wasn't expecting that it could get worse. I mean, theoretically, it could, but if it doesn't,
I will miss the opportunity, but the market kept falling and falling. Of course,
I bought more stocks, and on the 17th of March, the federal reserve said that - listen, guys,
we understand that the economy hasn't recovered yet, some business, of course,
are doing better than they did last year, but we feel like, in the next few years,
we will keep interest rates low. What do you think LOW means?
0 to 0.25 percent at best. You can't get lower than that unless you go negative,
which already happened in some countries. Anyways, it's a clear message from the fed that, this year,
we will keep the rates low, which means the market will most probably keep rising. Of course,
that's gonna cause inflation, but the fed said: “we know that, but that's not a problem now.”
Imagine what message does that sends to investors -
don't hold cash,
Because it's going to be worth a lot less! This means there will be more
money thrown into the stock market, which means stocks will keep rising.
So based on current circumstances, it's difficult to believe that there is going to be some kind of
a major crash in the coming future, at least till the end of the year. Another correction, maybe?!
I don't know, but corrections happen from time to time, so I wouldn't be surprised
to see a few of them throughout the year. Especially if you are dollar-cost averaging,
these dips are the perfect time to buy. If the market is heading higher and higher,
buying when there is a dip is a perfect option. By the way, I am not a financial adviser,
and everything I said in this video is for educational or entertainment purposes
and nothing more. So do not base your financial decisions on what random people say on YouTube.
Low-interest rates also mean that companies will keep borrowing money. When interest rates are at
almost 0 percent. Any money you borrow is free. Even if you do not need that money, you will
still turn a profit if you borrow it and invest it elsewhere. It makes sense to borrow as much
as possible at 0.25 percent for example, so any return you make above 0.25 percent is considered
to be a profit so when the fed is planning to keep the rates at such a low rate until 2023,
its extremely difficult to imagine that there could be a crash or anything like that.
Of course, we don't know for sure whether interest rates will stay that low
for another 2 years, anything could change, but only time will tell.
What really worries me is higher bond rates. Bonds have an inverse relationship with the
market because bonds are much safer than the stock market. With stocks, the company could go bankrupt
or perform really poorly, but with government bonds, chances that the government will collapse
are really low so whenever bond rates rise, a lot of investors chose bonds over the stocks,
so the stock market slows down. But we will talk about that in
another video. For now, I really want to know your opinion about this new format.
Regular videos on the channel aren't going to stop, but we want to try something new
where I can update you about the financial news, about what's happening in the market, and try to
help you read between the lines. But to be able to make videos a bit quicker, we have to make them
simpler, so I am curious to know your opinion. Let me know that by giving this video
a thumbs up and commenting down below. thanks for watching and until next time.