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- 🏦 Why The Markets Fell Yesterday
🏦 Why The Markets Fell Yesterday
& market breadth hit a year-to-date low.
Austin & Robert from Rich Habits
December 19, 2024
Good morning,
A quick breakdown — in case you don’t have the time.
⭐ It’s not just the Fed that’s causing a market sell-off.
⭐ Austin & Robert broke down things to avoid when buying depreciating assets.
⭐ Bank of America’s cash allocation survey has hit a record low.
⭐ Market breadth hit a year-to-date low.
⭐ The Dow is having its longest losing streak since 1978.
Market Overview
As of market open, 12/19/2024
Chart of the Week
It’s not just the Fed that’s causing a market sell-off.
If you’re unaware, the Fed cut interest rates by 25 basis points yesterday — as expected.
However, they also indicated that they would only cut rates twice in 2025. Thereafter, the Fed expects to cut rates twice in 2026 and twice in 2027. This was a gut-punch to investors that believed the Fed was moving much more quickly toward lower interest rates, which would stimulate economic activity and the housing market.
That’s the bad news.
The good news is that the Fed also increased its projection for 2024 GDP growth to +2.5%. The committee also lowered its expected unemployment rate this year to 4.2%. The main takeaway from the Fed meeting is that they aren’t confident in inflation being conquered, but the economy is still doing well and employment in the United States remains solid.
“If you’re mad you didn’t sell ahead of this post-FOMC pullback, know that you realistically had little edge in predicting the market reaction, and take it as an opportunity to slow down. Don’t over-trade.
In the long run, with patience, you’ll be fine.”
The Fed isn’t the only cause for concern though.
You may not even realize it, but Congress is currently fighting over a massive spending deal. If it doesn’t pass, then we could face a government shutdown at the end of this week.
Trump came out against the 3-month spending stopgap that was introduced by House Speaker Mike Jonson on Wednesday. Elon Musk has also been leading the charge in encouraging Republicans to vote against the legislation.
We’ll be closely monitoring this situation and encourage you to do the same. Just remember — the Fed isn’t the only thing leading to this volatility. When you’re about to have a massive change in Washington D.C. leadership and a spending deadline comes right before Christmas… chaos can spook the markets.
We’re sitting on our hands and monitoring for now. Remember — the positions in your portfolio should be companies or ETFs that you’re happy to hold for years. Don’t let 48 hours of chaotic news make you think that you need to over-trade.
If you see scary headlines about the government shutting down, please don’t freak out and stuff all of your money under a mattress. It’s happened before, and we will be just fine over the long-term if it happens again.
The volatility that we expected to come in 2025 has already arrived right on our doorstep. Let’s embrace it with a calm demeanor and continue to position ourselves for long-term portfolio growth!
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In Case You Missed It…
In this week’s episode of the Rich Habits podcast (linked here) — Robert and Austin discussed the five biggest mistakes they believe people make when buying depreciating assets.
Here’s what they discussed:
Can’t Afford It — Far too many people are making payments each month on an expensive car, boat, or jet ski — while that new monthly payment was the money they were setting aside for saving and investing. If buying that depreciating asset is preventing you from saving and investing 15%-25% of your take-home pay each month… you can’t afford it!
Too Much Debt — Buyers often don’t understand what they’re getting into when they take on debt. If you’re going to be paying a high interest rate in order to own a depreciating asset, then you might as well pay cash or not buy the thing in the first place!
Putting Down Too Much Cash — Sometimes purchasers find themselves in the opposite situation and they get a competitive (low) interest rate. If that’s the case, then putting down too much cash could be a detriment to your investing journey! Historically, keeping that money in the markets would leave you in a better position than paying it off early.
Not Doing Research — Always take the time to research what you’re purchasing, compare price points, and negotiate the final sale. More often than not, the seller of what you’re trying to buy will come down from the “sticker price.”
Rolling Bad Debt — Please, please don’t roll your negative equity into another depreciating asset. Pay off depreciating assets before you even think about refinancing and getting yourself buried by more debt. Sometimes small personal loans can help you avoid rolling bad debt over and over.
Buying a car in the U.S. with a high monthly payment has sadly become the norm.
Please be honest about your budget and your financial goals before you sign the dotted line!
Here’s a link to the Q&A episode that was posted this morning.
We answered questions from: Blake E, Lisa D, Triet N, Josh, Tim W, and Luis C.
You can submit questions for these episodes by asking them inside of the Rich Habits Network, replying to this email, or sending us a DM on Instagram.
The Rich Habits Podcast is available on Spotify, Apple, iHeart, YouTube, and wherever else you get your content!
Robert’s Callout
Bank of America’s fund manager cash allocation survey hits record lows.
The graphic above shows the net percentage of fund managers that have overweight holdings in cash. It just so happens that this month has marked the lowest ever cash positions for fund managers. So low, in fact, that it went negative — which means fund managers are borrowing cash (margin) to buy more stocks.
So what does this mean? You could look at it a couple of ways.
The first way to look at things — which is more optimistic — is that professional money managers are very bullish… at least in the short-term. There’s a lot of positive catalysts that have been driving the markets higher. Therefore, they would rather be investing their dollars than letting them sit idle in cash.
The second way to look at this is a bit more pessimistic. It’s that any signs of a sizable market correction will force fund managers to sell their holdings and wait things out … all at once! Considering their entire funds are invested into the markets right now, if a sizable correction does come — these fund managers have no new cash to use to “buy the dip.” Which means they’ll likely sell (causing prices to fall further) and wait out the volatility.
I consistently preach two things:
1) When in doubt, zoom out.
2) Dollar cost averaging can save you from heartache.
There was a big market sell-off this week, and nobody could have predicted it. However, when you zoom out and look at how the market has performed over the last two years — it seems pretty reasonable.
Keep calm and continue to monitor the markets!
Austin’s Callout
After 13 consecutive days of declining breadth, the bottom fell out yesterday.
As a quick reminder, “market breadth” is defined as the total number of participants in a rally — the higher the breadth the more participants.
Think about it like this, if 70% of the stocks inside of the S&P 500 are rallying — then we're in a strong market! If the opposite happens and 70% of the stocks inside the index are falling — then a further pullback is to be expected.
As you can see from the image above, market breadth has been falling for roughly two weeks now — and it finally kicked the bucket yesterday after the Fed surprised everyone with only two rate cuts forecasted for 2025.
Only 20% of the S&P 500 components closed the day yesterday above their 50-day moving averages. Market breadth hasn’t been this low all year, with the last time it was this low the S&P 500 fell roughly -5.5% during the month of April.
We know there are underlying catalysts that should continue to drive this market higher over time — rate cuts, low unemployment, deregulations, lower corporate tax rates, etc.
With that being said, I firmly believe we’re in a “stock picker’s market.” There will be major winners in 2025 — including quantum computing, cryptocurrency, defense, nuclear, and more. We plan to take advantage of this opportunity to “buy the dip” and continue to build large positions in wonderful companies.
The S&P 500 is up +25% year-to-date. We should be celebrating!
The Rich Habits Radar
👉 The Dow is having its longest losing streak since 1978.
👉 The Supreme Court agreed to hear a challenge to the potential TikTok ban.
👉 Honda & Nissan are discussing a merger to be more competitive with EVs.
👉 Micron shares fell due to weak Q2 guidance.
👉 AT&T follows Amazon, requires office workers to return 5 days / week.
👉 Starlink’s IPO rumors continue to circulate as we head into 2025.
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