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  • Last week has been pretty rough for the stock market.

  • When everyone thought that these stocks are going to grow forever, Major tech stocks completely

  • collapsed and experienced a drop day after day.

  • Apple, Google, Tesla, every tech stock is pretty much down.

  • And that's not by accident.

  • The stock market has been overvalued for the last few months since the stock market has

  • been rising like there is no tomorrow.

  • And when the market is at its peak!

  • What do you do!

  • Sell!

  • And that's what has been happening recently.

  • At the beginning of August, Bezos first sold over 3.1 billion dollars of amazon stocks.

  • At the end of August, Tim Cook sold 131.7 million dollars of apple stocks since it probably

  • won't cross the 2 trillion dollar mark at least in the coming year or two.

  • On September 1st, Tesla announced that it would raise 5 billion dollars by selling stocks

  • from time to time, but it seems like that time wasn't long.

  • By September 4th, within three days, they sold off everything and raised 5 billion dollars.

  • It seems like Musk also thinks that the price was at all times high.

  • And that's one reason why the market has been falling.

  • The demand and supply usually set the price.

  • Since the beginning of the pandemic, there has been a lot of uncertainty about the future,

  • but what we knew for sure that we need to practice social distancing, and a lot of jobs

  • are going to be from home.

  • Automation is going to accelerate, in other words, technology is basically the future

  • so investors had to keep their wealth somewhere safe and most important somewhere where it

  • would continue to grow despite the pandemic and tech companies seemed like the best option

  • besides gold.

  • That's why gold prices and tech companies grew exponantioally since there was much more

  • cash chasing limited amount of stocks.

  • Hence, prices rose dramatically.

  • Once early investors realized that prices are significantly overvalued, they decided

  • to sell and rip off the profits as would any rational investor.

  • And one of the problems with the market is that most investors are not rational.

  • In the past, you had to study finance, understand financial statements, and make reasonable

  • financial decisions, today, you can buy stocks with a few clicks on your smartphone, so If

  • you are seeing in the news that apple, Tesla, or amazon stocks are growing dramatically!

  • Why not take the ride with them and also get rich quickly!

  • And when the market starts falling, people panic and start selling to minimize losses,

  • which drives prices down.

  • why stocks are overvalued

  • Take Apple, for example.

  • Just in December of last year, its price to earnings ratio was 17.7, which means for every

  • dollar you invest, it will take the company 17.7 years to pay back the amount you paid

  • for each share.

  • Since the industry average is 15, apple was quite a good investment back then.

  • But then suddenly, in less than a year, its PE ratio jumps to almost 40 when its earnings

  • were pretty much the same as the last year.

  • Of course, price to earnings ratio isn't the most accurate way to value a company since

  • it uses the company's earnings for the last 12 months.

  • So let's take a look at the forward P/E ratio.

  • How much experts predict the company is going to earn.

  • Last year it was a little over 22.17.

  • Since its price to earnings ratio has more than doubled, its forward PE ratio should

  • have as well?

  • Right?

  • Not at all.

  • It jumped slightly to 28 as of September 2020.

  • Which is another indicator that the stock price is probably overvalued?

  • That's why it has fallen to 34 at the time of writing this script and would probably

  • keep falling to around 20.

  • Of course, relying on some ratios to judge the market isn't the most accurate method,

  • but it's not just apple, but also Tesla, amazon, google, and others.

  • However, not the entire market is overvalued.

  • Many companies haven't recovered to their pre-pandemic levels yet.

  • It's only the tech companies that surged dramatically.

  • So, The question is Will the market crash again?

  • The United States handled COVID-19 terribly.

  • Cases might have dropped to 30 or 40 thousand a day, but that's still significantly high.

  • And as we approach the winter, experts are warning that cases might spike again.

  • On top of that, take into account that the election is coming, you have a perfect recipe

  • for another market crash.

  • Elections create uncertainty.

  • Which means investors don't know what's going to happen.

  • Regardless of which candidate do you support, we have to put the facts on the table.

  • If trump gets elected, we will have massive protests, which will also increase COVID 19

  • cases, and will create more uncertainty.

  • And if Biden gets elected, then corporate taxes or even capital gain taxes would probably

  • spike, which means fewer earnings for companies and investors, which means stock prices would

  • drop.

  • But that doesn't mean that the market will crash as it did back in March.

  • Only time will tell.

  • But what we know for sure is that the Fed is going to do everything possible to keep

  • the economy stable because that's the job of the fed.

  • If the economy is rising too fast, it raises interest rates, for example, to slow it down.

  • When the market is falling dramatically, then the fed steps in to flood the market with

  • cash to make the crises a little less painful.

  • And that's what happened back in March.

  • The fed lowered interest to almost zero, issued stimulus checks, started buying corporate

  • debt.

  • It basically used every weapon in its arsenal to prevent the economy sliding into a recession,

  • the economy still went into recession, but the stock market grew exponentially since

  • the Fed made it clear that it's going to do everything to keep it stable.

  • However, that can't continue.

  • At some point, investors are going to realize that prices are inflated, and the bubble would

  • burst.

  • The Fed is trying to keep the economy stable until a vaccine is available so that everyone

  • will get back to work, and the economy keeps growing as it has been prior to that.

  • According to Bill Gates, who has long ago predicted this pandemic and heavily invested

  • in the top 6 companies working on a vaccine, a vaccine for COVID 19 will most likely be

  • ready by the beginning of 2021, so we are pretty close to it.

  • To what extend the market is going to crash in the next few months.

  • No one really knows.

  • But the main question is, should you sell or hold?

  • If you are a long term investor, you probably shouldn't care about what's happening in the

  • market because the market is always volatile.

  • It just sometimes its a bit more than other times.

  • If you are an ETF investor, you probably know that.

  • Because of these ETFs have just recently recovered to their pre-pandemic levels.

  • As the election is going to create uncertainty, the market might dip a little bit, maybe more,

  • but at the end of the day, it will bounce back to what it really worth.

  • For the last ten years, the market has been growing tremendously, and the Fed did a pretty

  • good job at keeping it growing.

  • It was the longest economic expansion in the history of the US.

  • I personally won't be selling anything because I am a long term investor, especially the

  • investments I have made this year because I will have to pay a high capital gain tax,

  • So I would rather just keep my investments.

  • But at the same time, I probably won't go heavy on any stock until after the election

  • if stocks bounce back to what they really worth.

  • Then I am all in.

  • If not, waiting for a little more would probably be a wiser option.

  • And now it's your turn to tell me if you are investing now or not?

  • Do you agree with me that we are in a bubble?

  • And which stock are you going to buy when the bubble bursts?

  • Let me know int he comments below.

Last week has been pretty rough for the stock market.

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