Today is an exciting day. Today we find out whether Fed Chair Jerome Powell helps ignite the DIRE Movement by telegraphing aggressive rate hikes in 2019 to stem nonexistent inflation or whether he decides to ease off the gas given the recent meltdown in the stock market.
A market-friendly Fed Chair would take a wait and see approach before raising rates given all signs are pointing to a slowdown. However, if JP doesn’t raise rates today and doesn’t signal for more rate hikes in the future, he may cast doubt on the strength of the US economy. Alas, he is stuck between a rock and a hard place.
I’ve never liked investing in stocks as much as I enjoy investing in real estate due to the volatility, occasional corporate malfeasance, and countless uncontrollable exogenous variables stocks face.
When you’re but a piddly minority investor with no say in anything, investing in stocks can sometimes feel hopeless. However, I recognize that investing in stocks is one of the best ways to build wealth over the long term, which is why I’ll always have at least 20% of my net worth in stocks.
Although losing money in the stock market is never fun, I thought I’d highlight some benefits of a stock market meltdown. After all, if it wasn’t for the global financial crisis, Financial Samurai would never have been born.
The Benefits Of A Stock Market Meltdown
- More humility. People tend to brag about their wins and hide their losses. When times are good, there is an incessant amount of boasting that can get extremely annoying after a while. It’s very similar to people posting only the best moments of their lives on social media. A return to modesty is a wonderful benefit of a cratering stock market.
- Reset expectations. People tend to get bearish when stocks are going down, and bullish when stocks are going up. Being a contrarian thinker by forecasting what might happen in the future is extremely difficult, but worth practicing. With lower earnings growth expectations, stocks now have a higher chance of beating beaten-down expectations, resulting in better future performance. The below chart shows that global fund managers are as pessimistic as they were during the global financial crisis, which seems excessive.
- Fewer crowds. A stock market boom creates more jobs. More jobs bring more people to restaurants, bars, and other entertainment venues. Due to more people, reservations and tickets are harder to come by. Everything is also more expensive. Further, traffic can become unbearable to the point where you don’t want to leave the house. Back in 2001, San Francisco was a pleasant city with lots more room thanks to the dotcom bubble pop. Now, San Francisco feels more like Manhattan, where every time you step outside feels like going to battle.
- The return of mega unemployment benefits. Sometimes, you just need a break from the grind. During the last financial crisis, the federal government stepped in and offered 73 weeks of additional unemployment benefits on top of the maximum 26 weeks of unemployment benefits by the state. Receiving $450/week, or $1,900/month can sure go a long way. Add on a potential severance package and thousands of Americans might finally be able to afford that long-term vacation they so desperately need.
- Development of better financial habits. When you’re losing a lot of money in the stock market, you’re forced to look at your budget to see where you can cut spending and boost saving. You’ll also spend more time analyzing your net worth because it’s suddenly at great risk. It often takes a financial shock to finally start aggressively staying on top of your finances. When times are good, it’s easy to take your financial well-being for granted.
- Diversifying investments. A lot of folks put their entire retirement nest egg into the stock market. It’s almost like having blind faith that index investing will all work out. If they can hold on for the long-term, their investments will probably turn out OK. But tell that to the people who were shaken out during the 2008-2009 financial crisis. If only they had a broader diversification of their wealth into bonds, real estate, and alternative investments. They may have been able to more easily pull through the mire.
- A catalyst to create a new income stream from nothing. Besides investing in other passive income generating investments, a bad enough stock market correction might force you to create your own income stream that is less dependent on exogenous variables outside of your control. Plenty of lifestyle businesses and traditional businesses were created during the last downturn because people simply had had enough of depending on other people for returns.
My Favorite Benefit Of A Stock Market Meltdown
Stock market meltdowns are great for those who are looking to buy stocks or buy pretty much anything that is dependent on the health of the economy. The worse the economy gets, the lower prices go.
My favorite benefit of a stock market meltdown is cheaper real estate prices. Unlike stocks, which can correct overnight, real estate usually takes years to decline given the asset class is less liquid. But I like slow-moving train wrecks because they give me the time to discover the ideal property without having to make a snap decision.
Although investment real estate can often be a defensive asset class during a downturn due to sticky rents (see the outperformance in REITs and alternative real estate investments), a primary residence may not perform as well if a homeowner gets a pay cut or loses his or her job. During the last recession, thousands of homeowners were forced to fire sale their homes at huge losses.
Therefore, those of you searching for a new primary residence should love a stock market collapse, especially while the Fed is raising rates. Already, inventory is growing in many big cities around the country. As the fear of a recession grows, further price declines are an inevitability.
Since 2016 I’ve been looking for my Honolulu beach home and years later, I’m absolutely thrilled to see continued weakness in residential property prices. This one home I visited in 2016 had an asking price of $4.7M. They might have accepted $4.5M if I had put in an offer. Today, I think there’s a decent chance the house could be had for $3.5M, a 25.5% decline from their original asking price.
It feels amazing to just wait and watch prices fall. This is as close to making money by doing nothing as I’ve ever seen. No wonder why economists fear deflation. If enough people just sit on their hands earning a healthy risk-free yield, self-perpetuating a decline in asset prices, economies fall apart as nobody ends up buying anything!
As the economy worsens, luxury assets that people don’t really need suffer the most. If you’ve been looking to inflate your lifestyle, a stock market collapse could be just what the doctor ordered!