Is there a stock market bubble and will it crash soon? – ForexLive – ForexLive

What are the signs saying?

Royal
Worried
about a stock market crash? Are stocks overheated? When will the bubble pop?
Suddenly you see your portfolio crashing down as a series of economic events
and malinvestments build up and get realized into simple price action. A bubble
builds up with hype and euphoria feeding its growth up until the time comes
when the bubble bursts and the crash materializes. Despite the burden of a
crash, a bunch of professional investors wait for such opportunities to cease
above average returns. They have enough discipline and foresight to look ahead
and anticipate that after a crash, a perfect timing to buy does exist, giving
their portfolio a skewed return on investment.

When
the pandemic first hit the world last year, financial markets and most asset
classes took a huge hit, triggering a short-lived bear market. The stock market
fell by an approximate 20% and a global economic recession followed. However,
after the sharp nosedive in March of 2020, the market began a subtle recovery.
All indices rose again, euphoria took a seat again, and by December 31, the
stock market had regained all its lost ground.

Valuations

Day
Trading might be the main driver of the market in this year’s first quarter;
however, market-based fundamentals must not be ignored. What catches the eye is
the Shiller price-to-earnings (P/E) ratio for the S&P 500. Historically,
going back 150 years, the S&P 500 has averaged a Shiller P/E of 16.78.
However now it is much higher at 35.30. Mean reversion trading strategies come
into play as current price divergences do reflect a feasible trade with an
attractive risk to reward.

COVID-19 variants

Also,
market participants should not ignore the ongoing complications of the
COVID-19. Much of the news we have received on the coronavirus has been decent,
as reflected into financial markets. Many vaccines are now being used to
inoculate the population, and millions are being vaccinated every month.
However, the virus keeps mutating. Some of the vaccines work well to contain or
halt the spread of these variants, but not all variants are the same. The point
being that if the vaccination campaign does not occur quickly enough, these
variants could show dominance and danger. Many people are choosing not to get
the vaccine or are taking a wait-and-see approach. However, for a full
recovery, this is not a choice. If too few people receive the vaccine, herd
immunity will be pushed further down the road. Professional traders see that
the stock market’s incredible 11-month bull run is insane, given the fact that
economies across the globe still did not fully recover. This surge in prices
may come to a halt, as it does not reflect the real economic well-being.
Although traders cannot predict when and how a crash sets up, many indicators
are signaling a change in the status quo. Some of which are discussed below.

Rising Treasury yields

The
multiyear housing boom could dry up at the blink of an eye. Current homeowners
and prospective buyers have been driven by historically low lending rates. Last
year, 10-year Treasury yields hit roughly 0.5%, paving the way for historically
low mortgage and refinance rates, as well as tempting homeowners to take equity
out of their homes. However, the yield curve has been steepening at an
incredibly fast pace. Even though rates could rise 100 basis points overnight
and still be well below historic averages, homeowners and prospective buyers
have been spoiled by historically low lending rates for years. In two instances
in the last decade when mortgage rates rose by approximately 100 basis points
relatively quickly, new mortgage and refinance applications fell off a cliff.
The housing boom has been perceived as a wealth-creating bright spot that is
giving homeowners quick access to cheap capital.

The drop in buybacks of
equities

The
drop in the buyback volume over the past few months will start to show certain
outcomes in the near future. In the last two years leading up to the COVID-19
pandemic, the S&P 500 buyback activity hit an all-time high. However,
during the peak of the coronavirus recession, bank stocks and a host of
brand-name companies announced that they would be reducing or completely
holding their buyback activity to conserve cash. Tight risk management on cash
outflows became a trend in the pandemic, as economic closures lead most
businesses to burn cash as lockdowns loomed in.

Adverse Issues to watch
in 2021:

  • COVID-19:
    The coronavirus is not ending anytime soon, and new strains are still emerging.
  • Unemployment:
    Millions of people remain unemployed and will possibly continue to live on
    stimulus checks and government benefits even after the pandemic gets
    suppressed. Despite the high unemployment in the U.S, housing prices are
    surging higher. To professionals, this sounds like a divergence, or maybe
    another housing crisis.
  • Inflation:
    With increased government spending, markets will probably eye an increase in
    inflation, which will probably lead to investors pulling back from certain
    assets.

An optimistic view into
2021:

  • Vaccinations:
    As more people are getting vaccinated, we will see an increase in optimism,
    movement and spending.
  • Existing
    and New Industries: As world economies fully reopen, corporations will see a
    continuous rise in value as their stocks again momentum. Also, some industries
    such as tech, e-commerce and biotech gained tons of ground during the pandemic
    and will continue to grow and give investors reason to feel confident.
  • Low
    interest rates: The Federal Reserve has promised to keep interest rates near
    zero, which will encourage spending.

In
essence, hype, euphoria and fear are essential elements in forming a cyclical
market. Financial markets should go through ups and downs, and many crashes
have occurred. However, historical data shows that recoveries are always around
the corner. You can day trade and try to ride the waves on a short-term basis
trying to catch pips and cents from every tick, but as a rational investor, you
should always rely on both fundamental and technical analysis. Nowadays any
news or any change in market environment, whether it was pharmaceuticals,
e-commerce, tech, or finance, is triggering a massive change in market
dynamics. Many signals indicate that markets will crash, but history shows that
with time, resilience always rules, and traders must be disciplined enough to
take advantage of opportunities. To become a professional, look for the signs,
study the inside of the market, analyze the fundamentals as well as the
technicals, do not get carried away by the hoard, and master your own trading
strategy.

This article was submitted
by Royal.

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