When you look at the stock market today, it looks quite a bit different from what we saw 6 years ago as the economic disaster of 2008 and 2009 was coming to an end. All in all, it looks pretty health…right? We've seen massive growth in a long term bull market! However, what if I told you that the market isn't necessarily as healthy as it appears to be? In fact, what if I told you that I'm expecting to see major volatility in the market toward the end of the year? Would you think I was crazy? Well, unfortunately for many investors, that's exactly what I'm here to tell you today. The bottom line is that the market simply isn't as healthy as it appears to be. Today, we'll look into what caused the bull market, what two big dangers the market faces, and what we can expect to see moving forward. So, let's get right to it.
What Sent The Bull Market Into Action?
The growth we've seen in the market started shortly after the financial crisis of 2008 and 2009 as the result of economic stimulus put in place by the Federal Reserve. Knowing that the US economy was struggling, the Federal reserve reduced interest rates and started a process known as quantitative easing; both of which were intended to be short term crutches to get the US economy back to where it needed to be. Since then, the economy has indeed grown and so too has the stock market. With lower interest rates, money is simply easier to be made in the market these days than it has been in the past.
Where Economic Stimulus Has Led The Market
While the market seems to be doing well, the massive growth we've seen over the past several years can be looked at as a direct reaction to economic stimulus. While this may seem like a good thing at first glance, when you dig into the data it becomes clear that it's anything but good. The reality is that thanks to economic stimulus making gains easier to come by in the market, investors have been taking more risk on than they should. This excessive risk taking has led us to a point of massive overvaluations as growth in the market continues to outpace key indicators like corporate earnings, consumer spending, exports, and more.
This Leads Back To The Federal Reserve
One of the biggest conversations in the finance world today has revolved around the Federal Reserve. As mentioned above, when economic stimulus was put into place, we all knew that it couldn't last forever. Although QE ended last year, low interest rates are maintaining investor excitement and keeping the bull running. However, we know that low interest rates are most likely going to come to an end relatively soon. As a matter of fact, one of the biggest discussions among the financial markets at the moment is the fact that most experts are expecting to see an interest rate hike in September. This is where the big issue comes in….
Get Ready For A Major Sell Off When The Federal Reserve Increases Rates
As mentioned above, the Federal Reserve is expected by most economists to raise interest rates in September. When this does happen, hold on tight because major volatility is on the way. The bottom line is that interest rates have played a major role in the bull market. Essentially, low interest rates are the primary reason for overvaluations in the market at the moment. When the interest rate is increased, investors will be forced to re-think their decisions. After all, higher interest rates place more risk back into the market; which will cause investors to re-balance their portfolios. When this happens, we'll most likely see a major sell off as investors get rid of investments that will then be considered too risky. So, in September, if the Federal Reserve does decide to increase rates, it will be time to start looking at call options as a way to gain profit in the market.
What Do You Think?
Do you think an interest rate hike is coming in September? If so, how do you think the market will react. Let us know in the comments below!