November 16, 2021

Stock market bubble now bigger than in 2000 or 2008

The US stock indices continue to rise. Indeed, it should already spook all investors and traders. If to switch to the H24 time frame of any of the three leading US stock indices, there is a clear upward trend that started in March 2020 and continues up to date. Of course, before moving upward, stock indices fell sharply. A plunge came also due to the coronavirus pandemic. Therefore, both trends are connected. In this light, growth in the S&P 500, the Dow Jones, and the NASDAQ does not seem so impressive. Nevertheless, the question remains: Were there real, market-based reasons for stock index gains during one of the biggest crises for the entire global economy?


Let's find out. Industrial production over this period either declined or did not grow. That is, only a few companies included in the above indices have increased production. Given all that, they unlikely saw an increase in revenue. Even if it did rise, then it was expressed in deferred demand first (consumers accumulated large sums of money during the pandemic), then total demand simply started to exceed production, boosting prices and possibly profits. In other words, shares of some companies, as well as the indices, have grown by 50-100% over the past 18 months and in some cases, even higher. However, it does not mean that companies have become more attractive to investors, have increased their profits, or have doubled production. This growth came only because the Fed and other central banks pumped trillions into their economies. This money would have ended up in markets in any case. Ultimately, this money also boosted inflation. For that reason, investors faced risks of losing their capital. They needed to protect it. But how? They needed to invest it. That is why the cryptocurrency market, shares, the stock market, retail estate, etc. are now on the rise. It is an inflationary growth, not an actual one. Under such circumstances, more experts are now warning of a bubble that is going to burst sooner or later. The US Federal Reserve has started monetary policy tightening. Other countries are also gradually slowing down the pace of asset purchases. Therefore, the moment the bubble collapses is approaching. Unfortunately, it is unclear when exactly it is going to happen. Indeed, traders should be prepared for it. In particular, they should never forget about a Stop-Loss order.