Oh My, A US Market Correction!
I am supposed to write about a new company today. But US Market Has Corrected Slightly Last Night!
Now that more of us are vested in the US market than SG market, I assume there is a certain amount of fear within ourself. If you had entered the US market only in the last 6 months, you maybe at a loss of what to do?
For a start, I had written an evergreen post on what to do during market correction in 2018 and it is still relevant today.
But at this point, it could be more important to understand why this correction is happening.
What Happened?
This was explained in detail in a MeetKelvin Video. But if you prefer reading, I will be writing about them here.
1. Short Term Bond Yields are increasing.
Basically, it seems like no one is buying the current US Treasury Bonds (aka T-Bills). Everyone is into equity now. Thus, a lower demand in T-Bills results in lower bond prices and higher yield.
2. US Government is giving out a US$1.9 trillion stimulus again.
This stimulus has to be partially supported by selling T-Bills. If investors know that there is another batch of T-Bills that coming out in the near term with a potential even higher yield, investors will wait. This further reduces the demand for the current batch of T-Bills.
3. 2% Inflation Target Ahead
Fed has announced a 2% sustainable inflation target for the long term. All of us don’t know when will this arrived. But if anyone buys the T-Bills (especially those 5 years and 10 years bonds) now at the current rates (which are all below 2%), this meant that the real yield in the future will be less than 2% - meaning you could be making a loss in the future.
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| Screengrab from FT.com |
4. Bitcoin FOMO + GME Short Squeeze
Excess cash will have to go somewhere. When there is selling happening somewhere, there must be buying elsewhere. In my opinion, again, GME share price has increased – this will have led those shorting the GME shares to cover the margin calls. This meant that the short sellers will need to sell their winners to get more cash to plug the short squeeze.
In addition, with inflation fears, in my opinion, Bitcoin has deem to be more inflation proof and also become more mainstream as Microstrategy and Square has added more Bitcoin recently. This may have led to other investors FOMOing into Bitcoin as well.
5. Rotation Play
This is probably the most “I do not like” reason. Because this actually emphasize on the fact that retail investors are always lagging behind the institutions and funds. Apparently weeks ago, institutions and funds are already stating they are going into “value” play like airlines, restaurants etc, due to the opening up of the economy. So once the big boys gets out, this is what you see.
How Should We Feel Moving Forward?
1. Zero Sum Game
From the recent GME Short Squeeze event and even the current correction, it made me believe that investing is a Zero Sum Game. 1 party loses – another party wins.
As discussed above, in my opinion, the initial GME event saw the FAANG stocks being sold down even when great results were announced. This might meant that the short sellers need funds to cover margin call.
As for this weeks’ correction, it seems like US funds and institutions are finding external safe haven to invest in. In my opinion, I seldom see scenarios like US market falls and SG market remains green – and this is happening now. Is SG market one of the selected safe haven?
2. More Stimulus
It is almost confirmed that there will be more stimulus being distributed into the US economy. Thus, at least in the near term or within 2021, I do see that the US market will eventually have a strong rebound.
3. Overseas Fund in China
As per article, it is stated that “Under current rules, individuals can spend up to US$50,000 per year on foreign currencies for travel, overseas study or work, but there are strict limitations on capital outflows.
For instance, Chinese individuals cannot directly invest in overseas stocks and bonds unless they are through banks or qualified institutional investors. Citizens are also banned from exchanging the yuan to buy property overseas.”
This one says already like never say. When you can do it through banks or qualified institutional investors, meant that this definitely can be done by individuals.
4. Systems in Investing
I hope most of you invest with a system in place. The system should not be solely reading other investors opinions. I had written about my system in the last post.
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