Beware the ‘meltdown’: Analysts say stocks could soar just before crashing

Mergers usually occur without any obvious economic reason for the gains. They occur when investors buy assets out of greed or fear of missing out, instead of fundamental improvements.

First, a quick background: the last five years have been very, very good for investors. The S&P 500 rose nearly 90% and the tech-heavy Nasdaq rose more than 140%. That includes two years of a pandemic that shuttered businesses and hampered global supply chains.

Now the market is grappling with the sad reality that all bull runs eventually come to an end.

Market watchers say the time may be near amid high inflation, an increasingly hawkish Federal Reserve and geopolitical unrest. Recently JPMorgan CEO Jamie Dimon warned of “storm clouds on the horizon”, former New York Fed Chairman Bill Dudley said he thought a recession was “inevitable” and the yield curve was inverted – when short-term debt yields more than long-term debt, seen as a sign that a bear market might be ahead.

Yet some analysts are predicting a stock market crash, in a rush of irrational buying that sends assets skyrocketing just before the bull market collapses.

Logically, the market must peak before falling. But historically, there was a significant acceleration towards that peak in the final months before a crash: in 1928, a year before the Great Depression, the Dow Jones reached new highs before collapsing nearly 90%. Prior to its collapse in March 2000, the Nasdaq had risen almost 200% in the previous 18 months.

Currently, sentiment data shows that investors are feeling very bearish about the direction of the market, and have been for the past two years – during which the S&P 500 returned 75%.

Analysts, meanwhile, are more bullish on individual stocks than they have been over the past decade. Of all stock ratings on Wall Street, more than 57% are currently “buy” ratings, the highest percentage since September 2011, according to an InvestorPlace analysis.

“That tells me all the bad news is being discounted in the market right now,” said David Hunter, chief macro strategist at Contrarian Macro Advisors. “We are at an inflection point for bonds, stocks, rates and the dollar.”

Investors fear monetary policy tightening from the Fed, Hunter says, but he thinks inflation is peaking and the tightening cycle will soon end. A quarter-percentage-point rate hike, he says, makes no sense when stock and home values ​​are nearly 30% above pre-pandemic levels and unemployment is high. historically low.
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“We believe that if the yield curve inverts, the data indicates that the stock market will experience a massive ‘meltdown’ over the next two years. We are talking about gains of 20% or more,” wrote Luke Lango, senior investment from InvestorPlace. analyst.

Hunter predicts that the next one or two quarters will bring huge gains for investors, but the downfall will also be significant. As stocks continue to soar, investors may become complacent just as prices fall.

In the heat of the moment, investors may feel a heightened sense of FOMO. But when the merger inevitably falls apart, they can be glad they waited.

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