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.
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%.
“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.”
“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.