According to our projections, the stock market may revisit the lows of 2020 or go even lower. The Federal Reserve is likely to hike interest rates as the situation gets more volatile, and credit and bond markets may react accordingly. However, due to the pandemic, it is taking longer to see any real panic in credit markets, as trillions of dollars flooded the economy, giving people a false sense of security. Inflation is also increasing sharply, and the job market is robust. The Fed wants the stock market to go lower to slow down consumer spending and prevent the economy from becoming too frothy. The current interest rates are high, and if they remain so, it will become difficult for people to afford debt. Therefore, driving the economy into a wall may be the solution.
The three stages of a bear market are a bubble pop, which happened in 2022, followed by a stage where people think the worst is over and get a false sense of hope, and the third stage where things start to break, usually in the credit markets. Interest rates on credit cards are around 20%, making it crucial for the Fed to control the economy. The side benefit of higher interest rates is that investors can move to risk-free investments like the 6-12 month T-bill, which yields about 5%. As a result, people are advised to sell their stocks and buy bonds. If the stock market craters, those who have invested in bonds will make a 5% risk-free return. It is expected to take about 30 months for the stock market to return to its highs so it’s wise to plan accordingly.
What You’ll Learn:
- Why the Fed has to see the stock market lower.
- Why the Fed has to have the economy slow down and go into recession.
- What a T-Bill is and how they work.
- The average time it takes for stocks to rebound.
Favorite Quote:
“The Fed will not ease their policy until stuff starts to break.” -Serge Berger
