To understand why we are in a bearish market, we need to understand key factors that affect market liquidity.
Let’s start with the interest rate, which is the first and perhaps the most important causative factor.
The western world has been operating a very low-interest rate system over the last decade, which has resulted in the world’s strongest economy being flooded with cheap money, particularly because to covid-19.
The majority of these low-cost funds made their way into the US and worldwide stock markets, causing asset prices to rise above their fundamentals. A practice of relying on financial borrowing to fund investment activities is also enabled by low-cost funds.
The problem is that when interest rates are raised, investors are forced to reduce their asset purchases, which has a negative impact on value.
As a result, with inflation topping 7% just two weeks ago, the US Federal Reserve decided enough was enough and decided to push ahead with its plans to raise interest rates in a couple of months.
According to reports, interest rates may be raised three times this year. To battle inflation, a JP Morgan CEO anticipates a 6-7x increase in interest rates.
This news has caused investors to react unfavorably, resulting in the present sell-offs. Money from a Helicopter – Following the outbreak of the global Covid-19 pandemic in early 2020, governments throughout the world responded with a spate of economic packages that poured cheap money into the economy.
Under President Trump and now Joe Biden, the United States has injected nearly $6 trillion in stimulus measures, including cash giveaways to residents.
While this was intended to boost economic growth during the Covid-19-induced recessions, it had unintended consequences, one of which was inflation.
Another significant side effect was the creation of a retail stock market bubble, which pushed financial asset values to all-time highs as investors overlooked fundamentals in pursuit of capital gains across asset classes.
Inflation – One of the initial responses by governments around the world to the Covid-19 Pandemic was to close borders and lower migration restrictions. This resulted in a serious logistical bottleneck and a significant gap.
Demand increased as countries throughout the world opened their markets, but worldwide supplies lagged, causing inflation to skyrocket. Central banks around the world initially mistook it for temporary inflation, only to realize later that it was sticky inflation with no signs of abating anytime soon.
To make matters worse, world leaders pushed billions into stimulus packages, some of which stimulated demand faster than supply could keep up.
What we are seeing now is the result of a confluence of circumstances that first caused an asset bubble, then increased inflation, causing central banks to raise interest rates, resulting in the present market sell-offs. This is why the market is collapsing, and we predict it will only get worse.