Look - The past two years the market was in a leveraged bubble [Source]:
| Month/Year | Debit Balances in Margin Accounts |
|---|---|
| Jan-20 | 561,812 |
| Feb-20 | 545,127 |
| March-20 | 479,291 |
| April-20 | 524,696 |
| May-20 | 552,543 |
| June-20 | 584,676 |
| Jul-20 | 613,830 |
| Aug-20 | 645,547 |
| Sep-20 | 654,324 |
| Oct-20 | 659,313 |
| Nov-20 | 722,118 |
| Dec-20 | 778,037 |
| Jan-21 | 798,605 |
| Feb-21 | 813,680 |
| Mar-21 | 822,551 |
| April-21 | 847,186 |
| May-21 | 861,626 |
| June-21 | 882,103 |
| July-21 | 844,324 |
| Aug-21 | 911,545 |
| Sep-21 | 903,117 |
| Oct-21 | 935,862 |
| Nov-21 | 918,598 |
| Dec-21 | 910,021 |
| Jan-22 | 829,637 |
| Feb-22 | 835,255 |
| Mar-22 | 799,659 |
The Fed created a situation that allowed markets to become extremely leveraged. Look at the Pandemic-Era Federal Reserve Facilities and you'll notice once The Fed made their support known in March and April the Recovery Started [March-20 & April-20].
The market becomes move and more leveraged as time goes on until Oct-21 when The Fed Says it Could Begin Tapering Process by November. Markets finally start to deleverage once The FED states that it will Begin Tapering in Nov-21.
My point in writing this is not about timing the market, but about making people understand the mechanics of what is happening:
But this is how margin debt and the stock market feed each other: Surging stock prices give people the urge to pile in, and they borrow money to do so, which drives up stock prices even further. But when the rally ends and stocks head south in a significant manner, and when people are highly leveraged, they will unload stocks to pay down their margin debt, and some will be forced to do so, and this drives down stock prices further.
However, the driving factor in all this is Monetary Policy because Margin Rates are usually based on Prime + Percentage. So, as Rates Increase the Margin Rates increase which means people are less likely to Buy on Margin which puts downward pressure on prices, which feeds into the vicious cycle mentioned above. Not only that, but DCF Valuation change once interest rate changes. Meaning, now everyone has to revaluate company fundamentals - and no one knows exactly when interest rates will stop rising or when.
The point is that it doesn't matter how strong the overall macroeconomy is or the company - stocks could still decrease because of market deleveraging. It could be that inflation has peaked, real wages increase, and the overall macroeconomy remains relatively strong. However, it won't matter - even in that situation stocks will continue to decline so long as Rates Increases.
------------
TL;DR - Monetary Policy and interest rates are more important for stock market Bears vs. Bulls than macroeconomic or company fundamentals when interest rates are changing. The only way to properly price a company based on fundamentals is when interest rates are neutral. Changes in interest rates create shock events - positive or negative - that change The Market. Until rates become neutral, and The Market fully adjusts to the new equilibrium, there will be more pain.
Submitted May 09, 2022 at 08:07PM by XiKeqiang https://ift.tt/MUSrv6f
