the main market indicators point to a correction in the next two months
While history does not necessarily repeat itself, the essential human instincts for survival, fear and greed, which change very little, often lead to similar scenarios. To understand the current state of the world market, it is worth taking a look back, as we will see that the world has more than once found itself in a similar economic development cycle.
The 2020-2021 period is considered to be one of the most successful in the history of the global stock market. In July of this year alone, market experts estimated that net inflows of individual U.S. stocks and exchange-traded funds reached nearly $ 16 billion. International equity funds also followed in the footsteps of their US counterparts, growing 1.9% in August and an annual increase of 11.3%.
Growing demand for consumer goods, such as food, electricity or fuel, is expected to mark a period of recovery, but this market optimism often leads in the opposite direction.
An example of such market optimism dates back to 1897-1899. Even though the world economy grew, unemployment fell and consumption rose – there was no shortage of money. Nonetheless, an overheating economy raised some concerns and it was becoming increasingly difficult to predict how this might affect the market.
The current state of the world market – rising commodity prices, growing consumer demand – seems to be a prophetic sign that we are moving in the same direction, the same as a hundred years ago. However, no grim forecast is set in stone, and in order to rationally assess a potential threat, it is first necessary to revisit key market indicators.
Excess supply leads to crisis
One of America’s most significant periods of prosperity, also known as the “Roaring Twenties,” began after 1918. With the outbreak of the Spanish Flu and the recovery after World War I, demand for various goods and services surged. In turn, the production capacity in the United States increased and the world entered a new phase of industrialization.
At the time, many economists and politicians dismissed any claims of economic overheating. Yale University Economist Irving Fisher said stock prices were in line with rising corporate profits, and later told a team of brokers that “stock prices have hit a steadily high plateau.” This was all said two weeks before October 24, 1929, the start of the Great Depression, also known as Black Thursday.
Naturally, the statements of economists and central bankers are not always the basis for the fall in stock prices. One of the main causes of the economic crisis of 1929 was overproduction and unpredictable growth in consumption. As the United States increased its production and extraction capacities, Europe, which had suddenly entered the game of consumption, created an oversupply. This led to a price war between producers, prompting Europe and the US to take protectionist action, prompting a response from the US Federal Reserve.
Until then, the Fed had for some time encouraged banks to cut lending for the purchase of securities on margin and threatened to cut banks if they did not stop lending to speculative growth in the markets. In the absence of these market warnings, the Fed felt that it was necessary to curb the too high stock market bubble and embarked on a drastic hike in key rates at the most inopportune moment, with a supply-demand imbalance.
Stock market indicators on the rise
2020-2021 will be one of the most successful periods in the history of the global stock market, but this situation appears to have more similarities than differences to previous events. The prices of raw materials are rising sharply, and household consumption is growing enormously due to the creation and improvement of the living environment due to containments linked to COVID-19. Similarities can be observed in the ultra-light monetary policy and in the process of de-globalization which has been going on for several years, with Chinese and American protectionist policies playing the role of first violin.
We can also compare the public statements that economists and analysts are making again – stock prices soar as corporate profits rise sharply, and the former Fed chief said we wouldn’t see a similar financial crisis. in our lifetime.
However, we must not forget the fundamental difference: the feeling that there is a lack and a deficit of everything. Companies continue to actively invest in capacity, and consumers wait patiently for items ordered, but is there really a production shortfall and will consumers really continue to improve their living environment, thereby increasing the excess demand? One can only guess.
To add more fuel to the fire – to possible elements of the formation of a stock market bubble – is the significant increase in stock prices since March 2009. During this period, the Nasdaq index has risen by more than 2,000% and the S&P 500 is over 600%. higher than in February 2009. By comparison, over the period 1990-2000 in March, the Nasdaq rose by 2,800% and the S&P 500 index by more than 500%.
The factors mentioned above create preconditions for a possible temporary 5-10% market correction in September and October of this year. It is true that if stock prices in the spring of next year follow the Fed’s guidelines for raising interest rates in 2022, it is likely that we will have a scenario of another expanding bubble during. 2-3 years. The reasons for its explosion will always be the same: a sharp drop in consumption, an oversupply of goods, a rise in base interest rates and rising unemployment.
The laws of physics state that whatever goes up must come down, so all market participants should perform a thorough analysis before making any investment decisions. Otherwise, if things go the wrong way, they can fall victim to mass syndrome.
Stokex is a boutique asset management company specializing in global market investments with a focus on the US market. The company, which has over 15 years of market experience, uses a unique dual approach to the investment process: statistical analysis and forecasting models are integrated with fundamental market knowledge.