The SP500 is Collapsing. (Why We are Buying)

Summary

This video script discusses the remarkable stock market melt-ups of 2024, 1999, and 1987, highlighting key financial conditions driving these extraordinary returns. The three main factors influencing the current market are falling U.S. interest rates, declining oil prices, and a weakening U.S. dollar. These conditions are seen as highly favorable for continued stock market growth, as they have historically led to bullish trends. The script also emphasizes the importance of staying flexible as a trader, keeping an eye on moving averages and adjusting strategies accordingly, while backtesting the positive outcomes of similar market conditions from past decades.

Takeaways

• 😀 The 2024, 1999, and 1987 stock markets all experienced spectacular 'melt-ups' with strong returns for investors, driven by specific financial conditions.
• 😀 The primary financial conditions fueling stock market growth today are US interest rates, oil prices, and the US dollar.
• 😀 A drop in the 2-year government bond yield suggests lower interest rates, which typically lead to increased stock market investments as cash becomes less attractive.
• 😀 Since November 2022, every time the 2-year yield has dropped, it has resulted in a significant stock market rally.
• 😀 Falling interest rates reduce the incentive to hold cash, leading investors to allocate more funds to stocks, thereby pushing up stock prices.
• 😀 The decline in oil prices, currently 20% down, has historically been a key driver of bullish stock markets by boosting consumer spending power and corporate profits.
• 😀 When oil prices fall, it reduces manufacturing and transportation costs, helping businesses expand and hire more workers, further boosting the stock market.
• 😀 In contrast, rising oil prices tend to depress consumer spending, shrink corporate profit margins, and often precede recessions.
• 😀 The US dollar has weakened significantly in early 2025, which boosts US exports by making US goods cheaper for foreign buyers, stimulating the economy.
• 😀 A weaker US dollar also enhances the value of international revenue for S&P 500 companies, contributing to higher stock prices.
• 😀 Historical patterns show that when all three conditions—falling interest rates, lower oil prices, and a weaker US dollar—align, the stock market typically performs very well, as seen in 1987 and 1999.

Q & A

What do the 2024, 1999, and 1987 stock markets have in common?

Each of these years experienced spectacular stock market melt-ups, providing huge returns for investors under specific conditions that were favorable for stock market growth.

What is the first key financial condition that could push stocks higher?

The first key condition is the interest rate on US government bonds, particularly the 2-year bond yield. A drop in this yield has historically led to large stock market rallies, as investors are more likely to allocate their portfolios to stocks instead of cash when interest rates are low.

Why is the falling interest rate on cash significant for the stock market?

When the interest rate on cash decreases, it reduces the incentive to hold cash, leading investors to allocate more to stocks. This shift in portfolio allocation can push stock prices higher.

What role do oil prices play in stock market performance?

Falling oil prices are favorable for the stock market as they increase consumer spending power, reduce corporate costs, and improve corporate profit margins. Historically, when oil prices have fallen, it has often been a driving factor behind stock market rallies.

What is the connection between rising oil prices and recessions?

Historically, major recessions have often been preceded by significant rises in oil prices. This is because higher oil prices increase the cost of living and reduce consumer spending, leading to economic slowdowns and corporate profit margin contraction.

How do oil prices impact corporate profitability?

Rising oil prices increase manufacturing and transportation costs for businesses, which can squeeze corporate profit margins. Conversely, falling oil prices reduce these costs, leading to expanded profit margins and potentially higher stock prices.

What is the third key financial condition affecting stocks today?

The third key condition is the weakening US dollar. A weaker dollar makes US goods cheaper for foreign markets, stimulating demand for US products and boosting the US economy. This can also lead to higher stock prices due to increased revenues from abroad.

How does the weakening US dollar impact the stock market?

A weaker dollar increases the value of foreign revenues for US companies, as they earn more when converting foreign currency into dollars. This can boost the stock prices of companies with significant international exposure.

What historical data supports the positive effect of a weak US dollar on the stock market?

Historical trends show that declines in the US dollar have consistently been accompanied by rises in the S&P 500. When the dollar weakens, it tends to stimulate the US manufacturing sector and boost stock prices, especially for companies with foreign revenue exposure.

What technical indicators are being observed in the current stock market?

Currently, the S&P 500 is retesting its 200-day moving average. This is seen as a key level that could mark the bottom of the correction. If the market holds above this level, it could continue the bullish trend, similar to past market melt-ups like in the 1990s.