Is the US Stock Market Bubble Going to Burst in the Next 18 Months?
Forecasting the future of the stock market is never as accurate as we would like, but current trends and actions suggest a potential for change. With the US economy still recovering from the COVID-19 pandemic and the Federal Reserve's monetary policies playing a critical role, it is imperative to understand the factors that could lead to a market correction.
The Current Situation and Market Sentiment
Since the last three years, I have had a relatively better understanding of market movements. However, for this upcoming year, the prediction is not as clear. To minimize risk, I am diversifying my investment portfolio and limiting the amount of capital tied up in a single position. Moreover, I am incorporating more day trading strategies to allow for faster liquidity and shorter-term trading opportunities.
The Market Bubble and Monetary Policies
A significant concern is the bubble in the US stock market, a phenomenon that has persisted despite the continued printing of money by the Federal Reserve. According to my analysis, the US stock markets are currently more expensive than historical averages, indicating that a correction is overdue. While market corrections do not necessarily lead to a full-blown crash due to rate hikes or tapering, the underlying issues could still result in volatile market conditions.
The Role of Inflation and the End of the Bond Buying Program
The end of the Federal Reserve's bond buying program by June 2022 and the subsequent focus on raising interest rates present a critical juncture. Theoretically, rate hikes should help mitigate the effects of a market bubble, but uncertainty remains regarding the next move by the central bank. If the Fed were to announce another stimulus package, it could alter the course of market events.
The Likelihood of a Massive Market Crash
A scenario where the market does see a massive crash is when global inflation, driven by the highest amount of money printed in history, causes significant economic challenges. In such a scenario, the fear of an armed conflict or a surprising bankruptcy could push the US into a recession. If the Federal Reserve had to choose between controlling inflation and providing economic support, the latter option might not be feasible due to the high levels of inflation.
Investment Strategies in the Current Market
Given the current market conditions, it is advisable to focus on large cap shares, which have a proven track record of generating consistent profits. Diversifying investments and avoiding momentum stocks is crucial. Over the next 18 months, as inflation catches up with stock prices and earnings, building a robust portfolio of safe stocks is recommended.
How to Prepare for a Correction
Investors should be prepared for potential corrections by investing in companies that offer stable long-term returns. This involves remaining invested in well-performing stocks, conserving profits gained over the past year, and focusing on low-risk stocks that can support long-term growth.
Disclaimer: My views are personal. Please consult your financial adviser before making any investment decisions. This article is for informational purposes only.