28.10.202107:23 Forex Analysis & Reviews: US stock market to plunge by 30%

Exchange Rates 28.10.2021 analysis

Major stock indices closed lower on Wednesday. Overall, they are still hovering around their historic highs. Meanwhile, even more experts and analysts expect the US stock market to be bearish. They pinpoint that the US stock market literally "bathed" in liquidity from the Fed in the past 18 months. Various estimates show that during this time, the Federal Reserve issued at least $4 trillion. Some of this money, of course, settled on the stock market, and some on the cryptocurrency market. This explains why both markets were bullish during the pandemic when they actually should have been bearish. However, money injected into the economy as part of the stimulus program cannot simply dissolve in it. Such funds push literally all prices higher. Inflation in the United States has been at the rate of 5.4% in recent months. At the same time, many sectors of the economy are logging even larger price increase. For example, US real estate is growing faster than by 5% per year. Some experts talk about 25% or 30% inflation. Meanwhile, energy boosts fuel prices. In other words, rising prices urge investors to look for highly profitable investment instruments in order not to lose their capital.

After all, if you just invest in stocks, their returns will not be able to cover inflation. Usually, returns of stock fluctuate in the range of 1-3% per year. For example, the revenue of tech behemoths Apple and Microsoft does not exceed 1%. Nevertheless, demand for shares of tech giants and other big companies has been rising in the recent 18 months. The reason for growing demand for such stocks is the same that drives bitcoin. Most market participants invest in these instruments, thereby provoking an increase in their value, which leads to a rise in the asset itself. Consequently, capital soars by more than 5% per year. At the same time, more experts suggest that after the completion of the Fed's tapering process, the situation on the stock market will drastically change. At first, cash flows will begin to decrease and the stock market will eventually experience a lack of liquidity. By the middle of next year, the QE program is likely to be fully curtailed, and the Fed will begin to raise interest rates, which will also deliver a severe blow to the stock market. All in all, any tightening of monetary policy is bad for stock indices and good for the US dollar. For that reason, the stock market is expected to enter a correction in the next 6 months. Even if there will be enough liquidity, many investors, expecting that the bubble is about to burst, might start selling some of their shares. The same goes for bitcoin.

*La presente analisi del mercato ha un carattere esclusivamente informativo e non rappresenta una guida per l`effettuazione di una transazione.

Paolo Greco,
Esperto analitico di InstaForex
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