Why the Stock Market is Falling

By Tom Stadum

Read Time: 5 minutes

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Hi everyone, Tom here!

This is going to be a different Tired & Rich edition.

I want to use this week to teach you how the stock market works, and why it got obliterated this past Monday.

Because if you know how the stock market works, you can:

• Be freer

• Retire earlier

• Pay cash for more things

• Take more trips with your kids

All the good stuff in life.

So, let’s get into it.

The Mystery of the Stock Market

The stock market moves in mysterious ways.

It's like a wild stallion made up of the best companies in the world, vying for more profits, faster growth, and revolutionary products and services that will shape the world.

It's fast, cutthroat, and unforgiving.

Investors earnestly seek out the best companies within it and shower them with their hard-earned money.

Investors punish the weak ones.

The world's governments watch them closely to gauge economic progress in light of their political agendas.

There's a way to ride them to riches and a way to ride them into ditches.

But sometimes, investors decide it's time to end the ride, all at the same time.

And that's what everyone did on Monday.

Everyone jumped off the stallion simultaneously, and it was rough.

Trillions of dollars were lost.

I only get to send you 52 emails a year and have about 5 minutes of your time per week, so I pick what I write to you carefully.

Rarely do I speak directly about what's happening in real time because building wealth is a 40-year game.

Usually, talking about a few days in the markets is a waste of time.

But a few times a year, we need to talk about the here and now.

And that is usually when investors get off the stallion en masse and create a blood bath of losses, just like this past Monday.

And when everyone else gets off the stallion, it's usually a good time to get on.

How We Got Here

To explain what happened, we need to briefly review the stock market's history over the past few years.

These massive stock market moves over the past few years can be traced back to one event that led to a domino effect in our economy, world, and markets.

The pandemic.

The very stock market you invest in today is still trying to figure out its way forward in light of the massive global changes it has brought.

Here are the events that led us to Monday:

1. Covid hit, everyone went into crisis mode, and economies were about to break.

2. The Federal Reserve moved in and kept us alive with massive cash infusions in 2020.

3. They put too much cash in, causing asset prices (stocks, real estate, Porsches, Rolexes, basically everything) to skyrocket in 2021.

4. This overabundance of cash led to the high inflation and interest rates in 2022.

5. The high interest rates killed inflation in 2023 (though prices have stayed high).

6. Which led to a good economy and great markets in 2024.

Now, to the present.

July 31st to August 2nd

The Federal Reserve (the people who control the amount of money in the US financial system) is run by a gentleman named Jerome "Jay" Powell.

Powell's job is to manage the US economy through its money supply.

He's got a huge job.

In doing so, he is one of the most powerful people on earth.

When he talks, and if you care about investing and your money, you listen.

On July 31st, he had a routine press conference to discuss the Federal Reserve's interest rate policy.

We, the people—you, me, and about 99% of Americans—eagerly awaited his answers, hoping for clarity on interest rates.

So, Powell stepped up to the mic on Wednesday last week at 1:30 CT and told us they will continue to be "data dependent" with their interest rate policy, meaning, "No, we will not lower them now."

The people were not impressed.

Stocks slid lower.

So, on Friday, August 2nd, the new jobs report (a key piece of economic data the Fed monitors) came out.

News emerged that American businesses created fewer jobs than people thought they would.

"Dang," everyone thought, "the economy must not be as good as the Fed said it was."

This disappointing data caused people to question whether the Fed is behind in managing the very economy you and I are reliant on for everything.

People sold their stocks and headed into the weekend wondering if they had it all wrong.

The Weekend of Wondering, and a Menacing Monday

After that horrible Friday, every investor thought the same thing over the weekend.

• Is the Fed wrong?

• Are we in a recession?

• Did the Fed screw it up and subsequently screw me over?

• Are we about to drive off the economic cliff?

• Do I need to get off the stallion and head for cover?

These questions are real.

Some reasoned that the Fed was wrong; we are in a recession, and on Monday, they would sell their stocks.

So they sold.

Monday was the worst day in the stock market in years.

I'll be honest; I've been doing this for a long time. I've seen a lot of these big down days, and they still make my stomach sick.

But should you be surprised about this downturn?

No. You should not be.

I am not surprised, either.

These big market moves happen far more frequently than people remember.

Just four months ago, in April, it looked like the markets would roll over. And what ended up happening?

Nothing, just a routine stock market downturn equivalent to a cloudy day.

The Aftermath

I've been telling people all week that there are two outcomes from the past ten days.

1. Investors will use the cash they already have (I wrote about this a few weeks back) to buy stocks at a discounted price, punishing those who jumped off the stallion on Monday.

2. This will turn into a larger market downturn and a recession, proving the Monday sellers right.

The market is leaning towards option one right now, as am I, which is more of a garden-variety stock market downturn.

We'll see where this goes, but I can tell you with certainty that the next few weeks are critical.

Be on your toes.

Look for opportunities to tax loss sell, make extra contributions, reposition your portfolio, buy stocks that got indiscriminately hit, Roth conversions, etc.

My team and I are working closely with clients to gauge where this is heading and how we can best be positioned for the multiple scenarios that could unfold.

There is a path through this, which is riddled with opportunities.

I will keep you updated in the weeks to come as things unfold.

The stock market may be mysterious, but there's nothing mysterious about a well-thought-out financial plan that includes a simple playbook for investing through bad markets.

Stay strong and keep riding.

We'll talk next week.

PS: We're currently working with several families switching to Fjell. They want our playbook of success, our transparency, our portfolios and our team to help ride through these uncertain times and retire on time. Head over to fjellcapital.com to learn more.

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Numbers

S&P 500: $5,344

Peak volatility index (VIX): 65.73

Earnings growth rate for the second quarter: 10.8%

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