Why the Market Crashed on Feb 25

Last Thursday (February 25) the stock market crashed on the majority of stocks including airlines, tech, recovery stocks and the overall kept falling on the 26th – the S&P500 dropped from 3,925.43 to 3,82934 and then to 3,811.15.

Why did this happen?

There are a few reasons, but the main reason is – Treasury Bonds.

If you don’t know what a Bond is let me explain.

Let’s say I have a piece of paper with 10 coupons in it. I’ll sell you the paper (bond) for $1000 and it will pay you around $101 for every year that you hold it (10 years / 1% yield).

Since bonds are backed by U.S.A it’s a “risk free” asset with a very small yield and this is optimal for big companies like Apple, Amazon etc, to park their money as they continuously need access to money to produce or buy other companies, and they can’t just YOLO on the stock market due to it’s volatility – except for Tesla that just invested $1B in Bitcoin, because Elon Musk.

And so if the yield of these bonds is low, companies tent to invest more into a riskier stock market, but if the yields on the bonds are high, might as well buy those because they are “risk free”.

This usually has an effect on the stock market – if the yield on the bonds are high, the companies invest in bonds dropping driving the stock prices down, and if the yields are low the companies usually prefer getting into the market driving prices up.

There is a yield point on the bonds where this happens. 

If the 10 year Bond passes 1.5%, stocks go down.

If the 5 year Bond passes 0.75%, stocks go down.

On Thursday, both went way passed that with the 10 year reaching a yield of over 1.55% and this caused a market sell off.

So companies went to buy bonds and that’s why the market when don right? 

Wrong, no one’s buying bounds right now and here’s why:

1 – No wanted to buy bonds because the stock market it looking very attractive because earning reports are coming very positive and things are looking good for the near future. Since no one is buying, prices have to come down.

2 – Massive stimulus is coming and how does the government get the money for the stimulus? They sell bonds… But why would a company buy bonds now when the government is about to flood the market with bonds making the price of bonds drop. Companies can just buy cheaper bonds after if they want.

3 – Inflation is (probably) coming. If your bond yield is at 1.5% and inflation comes at 2%, whoever gets those bonds will be loosing money! So it doesn’t make sense but buy them.

4 – Jerome Powell (Federal Reserve Chairman) is probably going to raise the yields on those bonds, so there’s no reason to buy a lower quality bond right now.

Now as for the reason stocks are getting crushed, there are several reasons.

People getting nervous about bonds going up and selling stocks in anticipation of a market sell off. Then there’s the GME short squeeze where to cover short squeezes the hedge funds have to sell some stocks of their long term portfolio like Apple and Amazon plus the evaluations of the almost all the companies very high at the moment. There are even talks about we being in a gigantic bubble right now.

So these are the reasons we’re seeing red all over the place (maybe except GameStop) .

For me, the main focus of my portfolio is growing dividend paying stocks so I usually don’t really care and actually like when the prices of stocks go down.

That will be all for today, I hope you learned something today if you have any questions or anything to add let me know.

Take care.

If you’re interested in joining the movement, I’m on eToro as pmendes88 where you can copy all my trades. I’ll be explaining all about my investment strategies here so make sure you follow the blog for weekly updates.

Image by Gerd Altmann from Pixabay

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