We have just entered one of the fastest market corrections in history. What happened and what is going to happen next?
Welcome to your Simply Economics. What next for the US stock market? This article will discuss how this crash came about, and what will happen to the US stock market over the foreseeable future. Read on to find out.
What even happened?
When news of COVID-19 first came out, it was the least of an investor’s worries. An ongoing trade war between China and the USA was influencing the US stock market, with the completion of the phase 1 deal causing markets to boom.
Furthermore, while most investors were distracted by the US-China trade deals, the overnight lending volume from the Fed was hitting highs not seen since 2018, and this money was being pumped directly into the stock markets by the banks. This, alongside the US-China trade deals helped the US stock market to new all-time highs, with the S&P 500 hitting 3334, and the Nasdaq Composite surpassing 9000.
When these new highs were achieved, the US was due a recession either in 2020 or 2021. Most believed the recession would come in 2021 as there’s an upcoming election when government spending increases to try and wade new supporters to vote for the government having the effect of economic growth but at the expense of a fiscal deficit – which comes with its downsides.
The imminent arrival of a US recession told us this rally was not going to last too long and even the most basic technical analysis tools told us that this growth was not sustainable. When it came to the S&P 500 the RSI, a leading oscillator, gave sell signals as early as December last year and the slow stochastic printed sell signals in early February. Furthermore, the candlesticks were showing signs of uncertainty and weakness in the rally on the 20th of February and by the 23rd the bears were in control.
What happened next took the world completely by surprise. In the UK alone, £36bn was wiped off the FTSE100 in one day of trading after fears of COVID-19 rapidly grew and stock markets across the world collapsed as economies were forced to shut down to avoid further spread of the disease. The Fed rushed to aid the collapsing US economy and announced a $2 trillion stimulus package, slashed the interest rate and announced an unlimited QE stimulus all of which, in my opinion, won’t protect the US stock market from another fall, which will see itself breach the lows set in March 2020.
Are we past the worst of the Stock Market fall?
In most stock market cycles leading up-to a crash, there is a period when non institutional investors and media are full of euphoria and delusion, it is at this point when you should close all your positions, at the least, as a crash is coming. We saw this in 1929, 2008 and in 2020.
After the initial fall, there is a period of rebound, known as the bull trap. It is a period of complacency and a time when investors believe a new bull market has begun, when in fact, the bear rally hasn’t finished. There are telltale signs that we are in this period at the moment and we are still due another fall, which will breach the lows of March. For example, the bottom formed in March is not strong, if it is tested again, it is likely to be breached. Furthermore, if you look at other crashes, for example, the 1929 crash, there was a bull trap too. In fact, in most crashes, there is a period, after the initial crash, of complacency where investors think a new bull market has begun when in fact it hasn’t.
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