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The U.S. markets keep rallying week over week, month over month, always beating new ATH.

At this point, the bears get out of the cave starting to point out the next market crash. I’m a bull investor, so I usually tend to view the future potential of the markets and the pretty side of it. Although, even as a bull investor, it is important to keep our feets on earth, and rationalize what's happening in the markets. 

Here is a bearish theory.

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?????????????????? is currently at the same levels as 2018, which is where FED wants it to remain, although it might not and we will understand why forward in this article. ???????????????? ?????????? are at 0.25% since March, and according to last FOMC meetings will remain so in the near term. 

Now, if we bring some other variables into the table: ?????? is recovering but still below 2019 levels, ???????????????? ???????? exploded with the stimulus packages and ???????????????? ???????????? ?????????? have also increased. We can also add that the ???????????? ???? ???????????? ?????????????????? has skyrocketed since the March crash with many people receiving “free” money and putting it in the stock market.

So even though savings rates are higher than ever, GDP is recovering and all the money being printed explains it, which is consequently increasing the amount of money in circulation in the economy. On other hand, the velocity of money is lower, which means that every dollar spent in the economy circulates at a lower rate than before, keeping inflation low. 

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Getting back to normal could be the catalyst. Once COVID-19 daily cases keep getting lower and restrictions are decreased, such as travelling, brick and mortar stores, events, circulation overall, etc., is where things will get tricky in the stock market. While the sentiment might look bullish by that time and people will open their pockets to spend some buckets in things they couldn’t during the quarantine, we’ll probably see the money velocity increase, making GDP soar and also inflation. This will lead FED to increase interest rates and ?????????????? ?????? ???????????? ???????????? (?? ?????????????? ????????????????????).

The problem with interest rates is that they affect borrowing and spending, both for consumers and businesses, leading the investors' sentiment to plummet.

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Technology is deflationary (i.e. AI and Robotics) and with the innovation and disruption pace we are seeing in many industries, there is also the possibility that inflation could remain stable. The beauty of innovation is that it usually brings prices down through several variables, such as improving processes, bringing scalability, creating new micro-niches, and many others. This has also been one of the Jerome Powell narratives throughout its speeches in 2020 and 2021.

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So now we can understand what can end up bad, but also what can save the markets to crash (Technology). Corrections are common, healthy and good opportunities in the market and they will happen no matter what.

Timing the market is extremely difficult, even for the most experienced traders and investors. It can be smarter to ride the wave, than either betting against the market all the time or sit on cash. Take advantage of the market's irrationality and put your money on the work.

Make sure that you invest in companies that will at least keep growing in the next 10 years, no matter what are the levels of inflation, interest rates, unemployment, whatever. Look for strong businesses and solid management teams that can adapt to the market's conditions.

Would you like to invest with no effort? Find my profile on eToro:

?? https://www.etoro.com/people/paulogabrielsa

Thanks for reading.

Let me know what's your opinion in the comments down below.

Send me PM if you want to connect and discuss furthermore.


All the best,

Paulo Sá