What’s the impact of the death cross on your investments?
Have you seen the headline and the images that ran across the financial news services warning about the Death Cross? Are we all doomed?
Here is some explanation about what’s going on and why they call it a Death Cross:
(Bloomberg, Friday 18 Feb 2022) — The Nasdaq Composite Index tumbled into an ominous “death cross” technical formation Friday for the first time since April 2020, when the pandemic battered the global economy and U.S. equity markets swooned. Following Friday’s 1.2% decline, the index has now shed 16% since touching a record high on Nov. 19.
The pattern, which is used by some investors to assess longer-term trends, has at times presaged further weakness. It appears when an index’s short-term 50-day moving average crosses below its longer-term 200-day moving average. The formation occurred in June 2000 when the dot-com bubble burst and again in January 2008 ahead of the global financial crisis.
“When you hear ‘death cross’ your antenna goes up,” Jay Woods, chief market strategist at DriveWealth Institutional, said in a phone interview. “It doesn’t always mean doom and gloom is coming. It just means we’ll likely be in a more extended downtrend.”
With inflation surging, the Federal Reserve is preparing for its sharpest monetary policy tightening in decades in an attempt to bring down prices. This has sparked wild swings among the rate-sensitive tech, internet and growth stocks that fill the Nasdaq Composite, since their elevated valuations become targets as borrowing costs rise.
So what does this mean for investors and the average person?
Well, it really depends on what you have been doing with your money in the last few years and who you have been listening to as your advisor and mentor.
Some people are really into stock markets and after a pretty sustained run of the last 12 years, it is totally understandable that many folks started believing that stocks will just keep going up. That’s what also happened in the years before 2003. If you find yourself in that camp, I recommend reading the book “The Fourth Turning” of Ray Dalio’s latest book “The Changing World Order”. Both will describe how and why the world is cyclical. My suggestion is to secure your wins from the past few years unless you have invested in a few very long-term future stocks that you know you will hold for at least the next 10 years.
Anybody who has followed my articles, listened to our podcast or any podcast I was invited to as a guest or maybe even found me on social media platforms knows that I have been preaching to invest in Out-of-State turnkey residential real estate. Those of you who have done the same are probably smiling because your asset value increased a lot in the last few years and simultaneously you received cash flow and tax benefits.
There is a space that could still be affecting the second group of people. Many people who have started to embark on the IDEAL Investor Journey to get to their personal Time Freedom Point where passive income exceeds living expenses still have traditional jobs.
Yes, you are doing everything right if you turned any stock market wins and gains into cash and then used it as a down payment for your residential real estate investments and cash flow generation.
Still, you may have decided to postpone to review and make any changes to your retirement accounts. Especially if you have an employer-supported 401K plan or IRA plan, you most likely will find that the content is made up of stocks.
These stocks will not include the whole Nasdaq but with that exchange getting to a Death Cross we have to assume that the same is possible for the SP500, The DOW Jones, or the Russel2000. Your retirement accounts are typically holding mutual funds which in turn hold stock with different risk profiles.
Any exchange regardless of the name represents a collection of stocks. Every mutual fund your retirement money is invested in is also a collection of stocks.
When exchanges start showing Death Crosses you can count the days it will take for your mutual fund investments in retirement accounts will also show similar signs of weakness.
In addition to this aspect, don’t forget that we have historically high inflation. That’s good for value-assets. As you may have seen Gold has reached a multi-year high while the NASDAQ death cross appeared. Real estate has seen historic appreciation. On top of that we also, for the first time in 40 years, start seeing substantial wage growth, which will provide for rising rents for your residential real estate investments.
A Death Cross is not really a good thing but it affects different people and the investments of people differently.
As residential real estate investors, we are on the sunny side of this development but we will still hear and read about increasing fear. I suggest remaining calm and looking at the numbers.
For our investments, the valuation of the assets keeps climbing, partially due to inflation but also because there is a massive shortage of new-build properties. The same effect that causes inflation across all parts of the economy causes inflation in the prices of our assets and in rent. The nice part, in this case, is that we benefit from it, rather than suffer from it.
It will not be easy to tune out the noise and cries of fear and panic as the situation deteriorates. I predict that more exchanges will fall, the FED will keep increasing interest rates in a foolish effort to control inflation, there might be more death crosses on the horizon but if you stay the course that focuses on value asset infesting, you and I will be mere spectators who observe the reactions of the public and the pundits.
While they panic we will keep adding to our passive income portfolio, on our path to our personal Time Freedom Point, and focused on the life we will live when our passive income exceeds our living expenses.
if you like to join us on this journey, please get in touch, and let’s talk about it.