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Why the Stock Market is at an All Time High... Again?! | Economics Explained - YouTube
Channel: Economics Explained
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in the fallout of one of the most
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volatile american elections ever
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financial markets did something very
[4]
strange
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they rose and rose to new record levels
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again this would be unusual during even
[11]
a normal election where most investors
[13]
tend to sit back and wait for the dust
[15]
to settle but it is especially strange
[17]
in 2020
[18]
joe biden who everybody is at least 90
[21]
confident will be the next president
[22]
has spoken very openly about plans to
[24]
raise corporate taxes and this is coming
[27]
in conjunction with tensions around how
[28]
a transition to power
[30]
may or may not take place not to mention
[32]
that global pandemic
[34]
if investors are supposed to fear
[35]
uncertainty surely they would be
[37]
terrified of the current world that we
[39]
live in
[40]
logic would dictate that the best
[41]
outcome for the major corporations that
[43]
make up financial
[44]
markets would have been a nice simple
[46]
and decisive republican victory
[47]
at the end of the day they tend to be
[49]
slightly more pro-business
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instead what they got was an extremely
[53]
contentious democratic victory with the
[55]
potential to bring turbulence around key
[57]
issues like covered relief packages in
[59]
the coming months
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so what is going on here why have
[63]
markets rallied so hard in spite of all
[65]
this turbulence
[66]
will this market boom reverse if the
[68]
proposed policies of the biden campaign
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are actually rolled out and could it be
[71]
that investors just no longer favored
[73]
trump as president
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now this is becoming a bit of a common
[76]
trend but big disclaimer time
[78]
since this video we'll be looking at the
[79]
market rally in the context of the
[81]
election
[81]
we need to note that we are not
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politically advocating for one party or
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another
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everything over there in america land
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looks all kinds of crazy and we do not
[90]
want to get involved
[91]
at all we will be here to comment on the
[92]
economic fallout though
[94]
this episode of economics explained is
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brought to you by trends
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if you're a hustling entrepreneur
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investor or are thinking about starting
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the link is on the screen now and in the
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video description below
[139]
now this is actually the third time we
[140]
have explored a similar market rally on
[142]
the channel before
[143]
but we will be looking at a completely
[145]
different set of contributing factors
[147]
this time around
[148]
even still those other two videos are no
[150]
less relevant so if you are interested
[152]
in this topic
[153]
go and check out those videos there as
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well but in brief
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some major contributing factors are a
[158]
lot of money being pumped into the
[159]
system through quantitative easing from
[161]
the federal reserve
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creating an environment where people
[163]
have a decent amount of cash
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this combined with record low interest
[167]
rates means that people don't have
[168]
anywhere to keep their cash
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other than in the stock market where
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even if they only get a four or five
[173]
percent return
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it's better than the zero percent that
[175]
they would get in a bank
[177]
the other big reason we explored
[178]
previously were that foreign investors
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were moving their money into the us
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market which has historically been
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perceived as a
[184]
large stable safe house during times of
[186]
economic turbulence in the world
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now both of these factors are still true
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to a certain extent
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but much less so now than they were
[194]
earlier in the year
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government stimulus has slowed down
[197]
massively and was ground to a halt prior
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to the election by the senate being
[200]
dismissed
[201]
this is the main channel by which that
[203]
money printing done by the federal
[204]
reserve gets out there into the world
[206]
what's more is that america is no longer
[209]
that same safe house it was for
[211]
international investors
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the turbulence around the election as
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well as the swelling infection rates
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across the nation
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mean that a lot of international
[217]
institutions and individuals are instead
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preferring to invest in their own
[221]
countries
[222]
which have comparatively fared a lot
[224]
better the international community
[226]
might also be able to pull some
[227]
influence in a way that people often
[229]
forget
[230]
their variable buying power since the
[232]
start of the pandemic
[233]
the american dollar has dropped
[235]
significantly compared to other world
[236]
reserve currencies like the euro
[238]
the yen and even the australian dollar
[240]
this actually came following a huge
[242]
spike in the value of us dollars during
[244]
the initial crash
[246]
when exchange rates are considered the s
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p 500 is
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still comparatively below its all-time
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high
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earlier in the year for example i am an
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australian that invests into american
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index funds
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using australian dollars and my
[260]
portfolio
[261]
is still comparatively worse off than it
[262]
was at the beginning of the year
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i know boohoo for me but it also means
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that as i earn a salary in australian
[269]
dollars
[269]
i can buy more american shares with the
[272]
same amount of cash
[273]
driving up prices all this is to say
[276]
that these two factors tend to be what
[278]
everyone points to to explain away the
[280]
market rally
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but if this really did explain
[283]
everything the new market high would
[285]
certainly not have waited until now to
[287]
show up
[288]
so what else is going on earlier this
[291]
week amidst all the chaos in the world
[292]
pfizer announced that they had developed
[294]
a vaccine with a 90
[296]
effectiveness in initial trials this was
[299]
great news and gave an indication to the
[301]
world that this ordeal may soon be
[302]
coming to an end
[303]
an end where life can go back to normal
[306]
where people can go out go to work go to
[308]
dinner go on holidays
[309]
all things that will breathe life back
[311]
into businesses that have been hanging
[313]
on
[313]
by a thread now this is very good news
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obviously
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and we don't want to in any way diminish
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this impressive achievement by pfizer
[320]
and the wider medical research community
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but the overwhelming message from
[324]
professionals in the know is not to get
[326]
overly excited about this news
[327]
just yet medicine is a legendarily
[331]
bureaucratic business
[332]
any new product has to jump through an
[333]
endless array of hoops before it is
[335]
released to the general public
[337]
especially when it's a vaccine which has
[339]
an even higher set of standards of
[341]
testing
[342]
because it is given to healthy people
[344]
rather than to people that are already
[345]
sick
[346]
now given the potential benefits pfizer
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is in talks with the fda to fast track
[350]
this process
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cutting it down from something that
[352]
would have normally taken years to
[354]
something that could be rolled out
[355]
within a few months
[356]
but for this to be approved there can be
[358]
absolutely no signs of
[360]
any complications even still sometimes
[363]
just the glimmer of hope is enough for
[364]
investors to think that other investors
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are going to get into the market and so
[367]
they get into the market to try and beat
[369]
out those other investors and so on and
[371]
so forth until the type of reaction you
[372]
would expect from good news
[374]
is achieved even if the good news wasn't
[377]
that great
[378]
this is one of the key cognitive biases
[380]
that is taught to most professional
[381]
investors working for large institutions
[384]
the bandwagon bias means that people
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will look at the money they stand to
[387]
make
[387]
jump in safe in the comfort that there
[389]
will be some greater fool following
[391]
along
[391]
as for genuine long-term outlook if this
[394]
breakthrough is real
[395]
and remains on schedule for public
[397]
distribution it would lead to a
[398]
significant boost to the fundamentals of
[400]
companies that have been impacted by
[402]
this health crisis
[403]
airlines could fly again cruise ships
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could cruise again and
[406]
shopping malls could go back to being
[408]
packed out war zones on a sunday
[409]
afternoon
[410]
you know like the good old days the
[412]
thing is though
[413]
these aren't the stocks that have been
[414]
doing well during this price boom
[417]
retail and transport have done well
[419]
since the news broke
[420]
but have been outperformed even still by
[423]
technology companies
[424]
now this is especially weird because
[426]
technology companies haven't been too
[428]
badly affected by the new world that we
[430]
are living in
[431]
in fact some of them have benefited
[432]
greatly from online shopping
[434]
home deliveries and business
[435]
communication systems that have become a
[437]
requirement
[438]
rather than a luxury so why would these
[441]
businesses be doing better than the ones
[442]
that really stand again from this good
[444]
news
[445]
well perhaps this is a sign of a
[447]
troubled road to recovery
[449]
there are a lot of businesses out there
[451]
which are now almost exclusively reliant
[453]
on government stimulus to remain alive
[455]
mostly the businesses that we were
[457]
looking at earlier like retail
[458]
airlines and cruise lines given the
[460]
turbulence surrounding the election it
[462]
is likely that any talks of continued
[464]
stimulus are going to be pushed to the
[466]
side
[466]
in favor of arguing about the nuances of
[468]
a broken election system
[470]
this means that these companies may very
[472]
well fall into bankruptcy during this
[473]
drawn-out process
[474]
and even though the promise of a world
[476]
back to normal may only be a few months
[478]
away
[479]
it's no good to them when they are going
[480]
into receivership now
[482]
tech stocks by contrast are doing well
[484]
now and will probably be doing better in
[486]
a normal world with higher employment
[488]
this makes them a safer bet for future
[490]
prosperity
[491]
bill ackman a hedge fund manager who
[493]
profited over 2.6
[495]
billion dollars from a single trade that
[497]
predicted the first market downturn
[499]
has announced earlier this week in an
[500]
interview with the financial times
[502]
that he has taken out similar positions
[504]
again to bridge the credit gap of
[506]
unstable businesses
[507]
over the next 12 months there is no
[509]
point betting on what the biggest
[510]
recovery winner will be
[512]
if you aren't sure who is going to make
[514]
it to that recovery phase
[516]
but for those who do there is one other
[518]
piece of good news
[519]
that came out earlier last week a
[521]
landscape of gridlocked stability
[524]
investors love one thing above all else
[526]
and that is
[527]
certainty investors would rather know
[529]
that the world is going to be hit by a
[531]
giant asteroid for certain because
[533]
they could invest in bunkers and canned
[535]
food companies as opposed to only having
[536]
a
[537]
50 chance of being hit by an asteroid
[539]
because if the predictions don't come
[541]
true then those bunkers and canned food
[542]
reserves are not going to perform well
[544]
on their portfolio
[546]
we saw a slightly less extreme version
[548]
of this effect earlier in the year
[550]
when people were unsure about how bad
[552]
the fallout of the chronovirus would get
[554]
they wanted to pull their money out of
[555]
the market until they could pick and
[556]
choose where and when to put it back in
[559]
as soon as the world realized that oh
[560]
yeah this is bad
[562]
people begrudgingly reinvested just with
[564]
the outlook of backing companies that
[565]
would be able to weather the storm
[567]
now the future can never be 100 certain
[570]
but
[571]
when the outcomes of big changes in the
[573]
world are completely up in the air
[574]
most investors like to sit back and see
[577]
how things play out before funneling
[579]
all of their money into something even
[581]
if that means that they might miss out
[582]
on huge speculative gains
[584]
remember this is investing not gambling
[588]
although the line does sometimes get a
[590]
bit blurred even still
[592]
you might say well that kind of
[593]
uncertainty still exists and well yeah
[595]
that's true
[596]
but the election gave investors a much
[598]
bigger gift than you might expect
[600]
a mixed government regardless of who is
[603]
sitting in the oval office on the 21st
[605]
of january and again
[606]
i'm not getting into it you'll be crazy
[608]
it doesn't really matter because
[610]
neither party will control the house and
[612]
the senate and the presidency
[614]
this means that any laws or budgets that
[615]
they want to get past will either be
[617]
rejected by one step of this process
[619]
or will need to be watered down to get
[621]
the tick of approval from both parties
[623]
we went into a lot more detail as to how
[625]
this works on our trump verse biden
[626]
video so go and watch that if you're
[628]
interested in bureaucratic government
[630]
processes
[631]
now while this outcome might be less
[633]
than ideal for the political parties
[635]
it's great for investors biden's
[638]
proposed tax plans will likely not make
[640]
it through the republican-controlled
[641]
senate without a lot of changes
[644]
likewise any plans to cut welfare
[646]
spending or lower taxes further
[648]
will not get through the democratic
[650]
controlled house so it pushes government
[652]
policy changes into a bit of a stalemate
[654]
which is fantastic for investors for a
[657]
few reasons
[658]
the companies they are investing in can
[660]
work on the rules that exist in the
[661]
world now and don't have to be ready to
[663]
shift strategy at a moment's notice due
[665]
to some major change in policy
[667]
it also means that investors can project
[668]
growth over a longer term
[670]
rather than trading on back and forth
[672]
policy changes there is a
[674]
semi-humorous expression in
[676]
institutional investing don't
[678]
change anything ever at economics
[680]
explained we might call it stability and
[682]
confidence
[683]
but whatever you brand it there is one
[685]
way to make sure that nothing changes
[687]
ever
[688]
and that's to try and get politicians to
[689]
work on something together
[691]
[Applause]
[694]
all jokes aside this is a signal that
[696]
investors may be getting the best of
[698]
both worlds
[699]
overall donald trump's impacts on the
[701]
financial market have been
[702]
overwhelmingly positive driven heavily
[705]
by the tax cuts and jobs act of 2017
[708]
markets have grown steadily over his
[709]
term as president only really faltering
[712]
twice
[713]
once was the christmas crash of 2018
[715]
which was a very short but severe
[717]
downturn which was eventually alleviated
[719]
by strong consumer spending figures
[721]
and then the second wave was of course
[722]
the market's reaction to the pandemic in
[724]
early 2020
[725]
having a pro-business government has
[728]
surprise surprise
[729]
been good for business but it hasn't
[731]
been perfect
[733]
trade tensions have been a major concern
[735]
for a lot of multinationals in recent
[737]
years
[737]
businesses have been hesitant to
[739]
fine-tune supply chains
[740]
especially involving mexico and china
[743]
out of fear that they will be hit with
[744]
tariffs or be forced to reinvest into
[746]
alternatives
[747]
now while fiscal policy involves the
[749]
cooperation of the
[750]
legislative and executive branch of
[752]
government the president has a lot more
[754]
direct control over trade
[756]
through the department of commerce as
[758]
well as having face time with other
[759]
world leaders
[760]
one of joe biden's big contributions to
[762]
the obama administration
[764]
was shaping foreign policy through trade
[767]
and throughout his campaign he has
[768]
maintained positive rhetoric around
[770]
building these mutually beneficial
[772]
connections
[773]
if businesses could be handed a future
[775]
where they got to keep the tax cuts and
[776]
jobs act of 2017
[778]
while having certainty around global
[780]
supply chains and trade agreements
[781]
they would be very happy little jelly
[783]
beans indeed and
[785]
with the current mixed government it
[786]
looks like that might be exactly what
[788]
they're about to get
[789]
the idea that the markets are happy to
[791]
see trump go is pretty silly
[793]
remember four years ago his election
[795]
drove a market rally for exactly the
[797]
same reasons that we have explored
[799]
many times on this channel but as
[801]
heartless as it sounds
[803]
it might just be that his usefulness has
[805]
run its course
[806]
big businesses have gone tax cuts you
[808]
beauty we will take that
[810]
huge private sector stimulus don't mind
[812]
if we do
[813]
and now they are ready for the dessert
[815]
which is healthy international trade in
[816]
a world that might soon be back to
[818]
normal
[820]
the market can remain irrational longer
[823]
than rational investors can remain
[824]
solvent and who knows by the time this
[827]
video is made public the market could
[829]
have dropped 10 or shot up by 10
[831]
it really is anybody's guess at this
[833]
point there
[834]
are so many technical factors mixed with
[836]
human emotions that go into pricing a
[838]
stock that it really is hard to explain
[840]
from time to time
[841]
but even still it is a great gauge on
[843]
people's confidence in the world
[845]
people often joke that the stock market
[847]
is just a chart of rich people's
[848]
emotions and
[849]
as funny as that may sound it's
[851]
absolutely true
[852]
so if there's any takeaway from these
[854]
new record highs it's that something
[856]
is going on that makes wealthy people
[858]
happy in the meantime
[859]
average americans and citizens around
[861]
the world can only hope that this is
[862]
something that will make them happy as
[864]
well
[864]
now understanding what it is that makes
[866]
these influential people tick can be a
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difficult process
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one that can be made a lot easier with
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trends
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own startup or
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after you've rsvp'd for a few events
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keep in mind this data was previously
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only available to hedge funds and
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billion dollar consulting firms
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all of which is included in your trends
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subscription
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try it out for two weeks all for just
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ee again that's trends.co
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ee the link is on the screen now and in
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the video description below
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thanks for watching guys bye
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