 Good day, film investors! We are finally seeing some volatility in the markets and according to Bloomberg's yesterday's headline, there are some darkening clouds coming over the markets and the anxiety is rising. However, today on Friday I'm filming this Friday morning, so but I think the stock market will go or be stable or go up on Friday, even if terrible news from China came with the economy slowing down, but the government will intervene so that has balanced out markets. Nevertheless, the market is even higher over this week, but the volatility has increased a bit and the market is still three point something, four point higher over the year, so still very very positive. But in last week's video on stock market news I explained how stocks are risky, are expensive from a long-term perspective. In the news before that I explained how there will be a crash, but today I want to discuss what are the driving forces of the market, what drives stocks to go up, stocks to go down, what keeps the SAP 500 at these expensive levels and what might keep it or push it higher or lower. So today we're going to focus on the short-term market dynamics, the forces that drive the market, the medium-term market dynamics and the long-term market dynamics a little bit, even if I discussed them last week and we're going to hear from Jack Poggle, a Vanguard's founder, about what we can expect from stocks from the stock market in the long-term at this point in time. So let's start by looking at the short-term, then the medium-term and the long-term perspective on the stock market. It will be an amazing lesson and at the end of this video you will know exactly what you have to do in relation to your situation, should you be in stocks, should you be in bonds, should you be in something else, should you invest differently because this content will give you a good perspective on what's going on, what are the risks and rewards in the short, medium and long-term. Let's start. The short-term impact on stocks when JP Morgan comes out with a report saying that there is 60% recession in the next two years, then everybody is scared, oh my god, what happens to the stock market if there is a recession and that is the short-term impact on stocks that is sentiment because there have been such news for the past 10 years. Italy's wrecking havoc in Europe, their budget is crazy, stocks have been declining also in Italy, it is a very tough situation and that might spread around the world. Of course Chinese stock markets have been heavily, heavily hit again in the last year and there is really a big, big sentiment play because the margin that holds Chinese stocks is 600 billion under margin of stocks on a 5 trillion market. So every little decline is exaggerated by stock market margin calls where those who are betting by using debt on stocks have to sell them from their brokers. So that's why the extremely high volatility in China, even if the fundamental economics show 6.5% growth, something to keep in mind and take advantage of the volatility when you are investing in China but more due diligence is also needed there. On the New York Stock Exchange the stocks under margin is also 600 billion but around 600 billion but the stock market capitalization is more than 30 trillion, the Chinese stock market is 5 trillion and again 11-12% of it is under margin with the New York Stock Exchange 1.2% is under margin or 2%. So that's a huge difference and that's why you see the Chinese stock market going up and down like crazy while the S&P 500 is much more stable. There is not that much margin investing. As you can see here the China ETF is up only 10% over the next five years despite the economy doing great, 20% down so bear market for Chinese stocks since the beginning of this year and we might hit the 2016 lows if we get another month like the past month. Now also something very important for the sentiment big banks have started, also medium term here, big banks have started reporting their earnings and most of the gains are from one of items while the operating earnings are not that good which means the economy is slowing down. Why? There is one big reason for that and that is the Fed hiking rates and they are now debating as the minutes of their meeting came out, debating restrictive territory so really pushing on the brakes to slow down the overheating economy. So a substantial majority of participants expected that the year end 2020 and 2021 federal funds rate would be above their estimates of the longer run rate which means that when you look at yields if yields go higher asset values go lower yields interest rates work like gravity on stocks and other asset prices. So when Fed officials say that they might push interest rates beyond three let's say to four percent then everything turns and those are very big changes interest rates were zero for eight nine years and now we are talking of interest rates of four percent which means that the treasury US government treasury might yield five percent if that happens stocks will have dividend yields of five percent and not two percent which means stocks can fall 40 percent and that is creating anxiety over the medium term. So JP Morgan recession two years Fed rising interest rates by 2020 so that's another risk anxiety that will slowly evolve but if it's just a projection but if it happens then stocks are really in trouble if it's combined with a recession then it's even more trouble. So that's what is driving the market over the medium term so you will see this short-term volatility on sentiment bum up one percent down two percent and that will start increasing but the long-term trend given what's going on with the Fed the tightening given the probability of the recession will be a downward trend probably over the next year two years especially if something else happens which is another medium term driver will which will touch in a moment this is the longer run Fed summary for their projection for the federal funds rate it has been constantly declining over the past five years which means declining expectations for interest rates higher asset prices and we have seen the peak of asset prices of the stock market in January 2018 wherein their expectation for the long-run interest rate was at their bottom now it's going up and stocks are suffering very interesting chart what happens when the Fed starts tightening over the past one two three four five six seven eight nine ten eleven times that the Fed tightened that the Fed increased rates eight times we had a very very soon recession three times a recession didn't happen okay the rowing 60s then 1982 that was a short-term tightening after a big recession so we don't count that 1990 three four tightening no recession okay that was one out of ten or out of eight that was avoided however the Fed always tries to tighten before a recession so that they can lose their policies that can lower rates when a recession comes and that's exactly what they are doing now so JP Morgan might be really right and the Fed might be increasing rates to lower them later to stimulate the economy later how the tightening works we see here the 10-year treasury constant maturity rate is already at above 3 percent 3.15 so when you invest in stocks you should expect at least higher dividends that 3 percent the SAP is at 2 percent so that's what is putting pressure on the SAP 500 and this creates a special anxiety in the markets because for the past 10 years stocks have been going only up and people don't think that stocks can go lower because over the past decade they have been going only up up and up so why would now stop stop stocks stop going up how it is possible that stocks can go down well it is possible and that's what creating the unease the anxiety in people and that's why you see the higher volatility should i sell or should i buy because after 10 years everybody is greedy greedy greedy they just want more everybody is high on gains the Fed is slowing down the inflation in Europe with still monetary loose policies with still money printing inflation is also around 2 and in the US the red line inflation is also around 2 despite the tightening despite the increasing interest rates so the Fed for now is balancing very well and doing a great job but if you look how those higher interest rates affect the economy look at the new private housing units authorized by building permits so housing starts new housing starts they have started declining they picked in march 2018 and of course higher interest rates are not good for houses are not good for buying cars are not good for those who take loans that's why the banks don't show that great numbers even if they make more money with higher interest rates but the economy is seeing is feeling now starting to feel the effect of higher interest rates the Fed is trying to balance that as we have seen in that chart with recessions they never managed to balance that correctly and never managed to create a soft landing so i don't think they will manage to do that now however there is something else that drives stocks in the medium term that keeps stocks up and that is high employment so people work people have their salaries wages go a little bit up everybody has a little bit more money especially in the late part of the economic cycle everybody feels great everybody is positive everybody spends so that's what keeps earnings sales and what keeps stocks up unemployment all employees are the highest in the history of the united states 149 million and 500 000 so there are 150 million workers that get their salaries perhaps have something extra and they invest in stocks of course because stocks were the best investment over the last 10 years of course you should invest in index funds index funds index index index funds and look at blackrock they just released their earnings and the total long-term net inflows have been extremely high in 2017 and in the first quarter of 2018 when the s&p 500 peaked but they are still positive so there are still funds coming into the market everybody is pushing their money into the market no matter what into index funds if we look at their retail investments net flows we can see that retail investors are still pushing money into index funds and that the highest push was of course when the market was peaking in january etfs of course etfs are the best investment around now and money still very positive coming into etfs however institutional investors are pulling a little bit of money from the index funds and also pulling a little bit of money from their active investment funds but especially from index funds so we have here those employees the 150 million workers retail investors etfs investors they are still putting their money into the stock market which manages to balance the smart money that sees the recession that sees higher interest rates that sees okay now i can buy treasuries and get my return and manage my risk and those guys are already pulling their funds out if when the retail when the economy really gets hit when people starting from getting hired start to get fired then there will be low less flows into the market the retail will be lower the etfs will be lower the net flow of funds for all for black rock will be lower and then you have real pressure on the stocks so it's all a medium term let's say dynamic that you have to understand that's why the market doesn't crash 50 in one day that's why it goes slowly it goes up and down and first what increases is the volatility that we have been finally seeing in 2018 later we'll see the dynamic where it will go for now it slowly goes down even if in a volatile manner especially in emerging markets and when those employees start selling when there is more negative sentiment that all will pile up and we will really see the stock market crash when will that be next year in the next five years we cannot really know because trump will try to do something to push stocks higher attack the Fed lower interest rates so there is a lot of short term things that can happen but the eventual eventually it will go down because as I said in the last stock market news last Friday stocks are expensive and that is inevitable to hit the market somewhere now let me give you an indication of what to do that will really help you get perspective on this stock market and on where your investments might lead you and what you can do about it if we look at the SAP 500 with the risks with the higher interest rates with the recession risk it can easily fall 30 to 50 percent just think if the market falls 40 percent it would be just where it was five years ago so we are in a 10-year bull market just to where it was five years ago it's not that terrible but that would be a 37 percent drop which would be huge and which will hit a lot of people so that's the short term risk reward it can go really down a lot upside let's hear about the upside from the stock market investor above all jack boggle what you're expecting in terms of market returns for the equity and bond markets in the next decade sure it hadn't changed from what we talked about last year very much but there's a reality to the stock market let's take that first and the reality is that the fundamental return the dividend yield plus the earnings growth of companies drives the long-term return of the stock market the only thing gets in the way in the short term is a speculative return are people going to pay more for stocks are people going to pay less for a dollar of earnings in essence and if for example the price earnings multiple were to go from 10 to 20 that over a decade that would be 100 percent increase and be 7 percent added to the return each year so it can be very substantial and it also can be negative so PE goes from 20 to 10 minus 7 percent or roughly 7 percent a year so where are we now well the dividend yield is about 1.8 percent less than 2 percent I'm looking for future earnings growth of around five percent I don't think we can do much better than that maybe a lot better this year and with the tax cut and maybe maybe a little bit better next year too but maybe five percent so let's call the dividend yield two and five is seven by my numbers that's the investment return right two percent dividend yield five percent earnings growth that's a seven percent return and if the price earnings ratio is to go down a little bit I think one and a half percent off that seven percent return which would be a five and a half percent return on stocks over that period and that's a little higher than I've been using maybe right maybe wrong I've usually been using about four so as Jack Bogel says the fundamental earnings plus dividends are the drivers of the stock market return everything else is speculation so he says in the long term four five percent is what we can expect from stocks three four percent is what we can expect from bonds so in the balance there stocks bonds are much less risky now that stocks and this will have to let's say balance itself out so either stocks will yield six percent which would be the logical conclusion which means stocks will have to fall 40 40 percent so that's something to keep in mind that yes stocks will probably lead to four five percent over the next two decades to be a little bit more conservative than Bogel so if you're happy with two decades of waiting for four percent three percent returns with possibilities of extremely high volatility then you should keep to your stocks or balance between stocks and bonds so that's my first message look at what you can personally take as a risk so don't risk what you need in life for something you don't need in life that is my first message don't risk I don't know your safe retirement for another addition to your I don't know vacation home another room or making it closer to the beach if markets go up another year or two I can pay in force my son's tuition don't risk your retirement your safety net for such let's say crazier things because that's crazy secondly enjoy the gains of this stock market so we have had 10 great years sometimes the best thing to do is to really enjoy those gains say okay I'm done I made a lot of money I'm happy with what I have and it's time to enjoy to balance things out to check treasuries three percent short-term treasuries which is good for many many many people think about the risk reward message number three stocks have been going up for 35 years and that has been great will stocks continue to go up in the next 45 years that's a question you have to answer and you have to see okay it might happen it might not happen the world might be much different in the next three decades than it was in the past three decades so am I going to start diversifying my portfolio am I going to start look globally am I going to start look at protection gold hedges other kinds of hedges and that is what I do I look at stocks globally with higher interest rates higher yields higher earnings yields than what jack boggle describes with five percent I'm looking at 10 12 15 percent yields across the world accepting higher short-term volatility but I think equal risk as the sap 500 has at this point moment in time so if you want to see more about this third option about starting to thinking okay what else is out there in the world please check my stock market research platform to find perhaps interesting investments across the world so if you are not such an enterprising investor my stock market platform might not be for you if you are a passive investor tomorrow I'll make a video comparing the sap 500 index with Berkshire Hathaway which I think will be a much better investment over the next decade or two than the sap 500 so tune in tomorrow subscribe click that notification bell to get notified when there is a video coming up thank you for watching looking forward to your comments and I'll see you in the next video