I'll Explain EXACTLY Why the Stock Market Crashed Today

[00:00:00] Speaker 1: Just a quick video today, but I want to clear things up in case you might be a little bit confused about what happened in the stock market today. First thing this morning, we got a stellar U.S. jobs report. The economy added almost double the jobs that we were expecting. So of course, more people working means more income, more spending, generally a healthier economy. So, so far that's good news. However, the markets absolutely tanked. Just look at these numbers. Everything was down. The NASDAQ dropped almost 5%. Look at the VIX up 39% on the day. So the cause of that is yes, those pesky bonds, right? The yields spiked again today. I'm going to look at those numbers here in just a moment. First though, why would the bond market react to this great employment news by pushing yields higher? The answer to that is not intuitive. I did want to make this video because I think that the bond market is often overlooked by individual investors. Stocks, of course, get all the attention. They're exciting. You know, they're easier to follow. You see them everywhere you look and they are frankly a lot more entertaining to talk about, but the bond market is more important. And the big goal I have here on this channel is to help people understand how that works because whether you're buying stocks, whether you're buying a home, if you're running a business, the bond market matters to you. So in this video, I want to use today's jobs report, the one that came out this morning as the perfect example. So let's start by looking at what actually happened. The U.S. economy added 172,000 jobs in May. That is way above expectations. They were roughly 80,000 jobs. At the same time, the unemployment rate, that was unchanged. It came in at 4.3%. In other words, the labor market came in way stronger than the economists were expecting. Almost immediately though, the treasury yields move higher. The two-year treasury yield rose sharply. The 10-year treasury yield, that jumped too. It reached its highest level in several weeks and the 30-year yield went up as well. Now to understand why this all happened, we need to think about what investors expected before this morning's reports came out, right? For a lot of this year so far, the markets have been looking for any signs that the economy was gradually cooling, not collapsing, nobody wants that, nobody wants a recession, but just slowing down enough so that the inflationary pressures would continue to ease. And if that happens, the Federal Reserve, they would have more room, more likelihood that they would be lowering interest rates. That's good, of course, for investments, lower interest rates. They are positive for existing bonds because newly issued bonds would offer lower yields. So that would make today's bonds more attractive. But the report out this morning threw a wrench into that story. Instead of showing a labour market that was steadily weakening, the data showed that employers are still hiring at a fairly healthy pace. Now, I got a point out here, this one jobs report, that's not going to change everything, right? You look at these reports, we've learned this over the past year, there's a lot of noise in the economic data, reports get revised, and we want to look for trends. That matters more than individual months. However, the markets were kind of fickle, right? We don't wait for absolute certainty. The markets will react based on probabilities. And today's report, that caused the markets to sort of reassess the probability of near term interest rate cuts. It's looking less and less likely. And if you think about it, from the perspective of the Federal Reserve, they have spent years now trying to bring that inflation under control. Yes, inflation has come down a lot from the peak. But the Fed still needs to feel sort of more confident that the price pressures are going to be fully contained. And when we see the strong labour market numbers we saw this morning, that makes their job a lot more complicated. Like I sort of said earlier, when people have jobs, they earn income, when they earn income, they go, they spend that money, businesses will see stronger demand, and they often have better pricing power. When employers compete for workers, of course, we expect wages to rise. Now, I do want to be clear here. A healthy labour market generally, that's a good thing. I'm not arguing here that job growth is somehow bad. The issue we're talking about today is that stronger economic activity can make it harder for inflation to cool as quickly as the Fed would like. So when investors this morning saw this stronger than expected jobs report, a lot of them just jumped to the conclusion that the Fed now has less reason to cut rates in the near future. And that's where the bond yields come into the picture. One of the most common misconceptions about bonds is that the yields sort of follow whatever the Federal Reserve is doing. However, the reality is that bond yields are largely driven by expectations about the future. Let's think about how it works. When investors buy treasury bonds, they are making a judgment about where inflation is going, economic growth, where interest rates are likely to be over the life of that bond, right? So if investors suddenly believe that rates are going to be higher for longer than they previously expected, then existing bonds become less attractive. If you do the math, imagine you own a bond that yields 4%. Well, if the markets start to expect future bonds to offer, say, 4.5% or 5%, well, then other investors, they're not going to be willing to pay you as much for your bond that's yielding 4%. What happens then? Well, the price of that falls, right? And because bond prices and yields move in opposite direction, then the yield is rising. And that is exactly what happened after we saw those reports this morning. It's not that investors were necessarily reacting to the jobs number themselves, right? They were reacting to what those numbers mean for the future Fed policy. And in other words, the bond market wasn't saying the economy is too strong. Nobody's going to say that. It was basically saying the economy is strong enough that the Fed might be keeping rates higher for longer than most people would like. And that is a very, very important distinction. And that's why the 2-year, the 10-year, the 30-year all moved higher. The market's outlook for future interest rates shifted upward. Now, this matters. We have to keep... This is probably the most important part of this video. This matters way beyond the bond market itself because I know a lot of people aren't too keen on following that. But we think of things like mortgage rates, corporate borrowing costs, even stock valuations. The yields on the Treasuries influence all of those numbers. So when those yields rise, borrowing becomes more expensive throughout the economy. Companies face higher financing costs. You're a home buyer. You might encounter higher mortgage rates. Investors might reassess how much they're willing to pay for future earnings. So all of those things come into play when events occur like they did this morning. So the key takeaway is not that investors were disappointed by a strong jobs report. It is that the stronger economic data reduced expectations for any rate cuts in the near term. And those are already low. The strong jobs data that led investors to believe that the Fed can actually remain patient for longer. The more patient the Federal Reserve is, that of course, means higher expected interest rates in the meantime. That will generally lead to higher Treasury yields. And that is the chain of the whole logic here. You've got strong job reports, you've got fewer expected rate cuts, you've got higher expected future rates, and then higher Treasury yields as well. And that is kind of a short lesson. I know I spoke quickly today, but I wanted to get through this on how the bond market works and how it affects almost everything else. Now, if you found this helpful, let me know what your thoughts are in the comments below. Please subscribe and like the video. Thank you so much for watching and we'll see you in the next video.