Hi everyone, there's been a whole lot of talk about a market crash on reddit lately. Most of that chatter comes from WSB and not this sub but there is still some talk of it on this sub. I wanted to give my 2 cents on the issue and start a discussion on the topic. I usually see people talking about market crashes on reddit referring to 3 key issues: the price of equities, inflation, and reverse repo. I am going to address all of those here.
The price of equities
Many people are worried about the soaring prices of stocks right now. If you take a look at the SPX or NDX or really any index, the RSI will say that it's oversold. Additionally, the market hasn't had a 5% correction since October of LAST YEAR. Even more, the market is making new all time highs almost every single month and it seems like the stock market just keeps going up and won't stop. Despite all of this, I am not sold in the least bit on this being a cause for a market crash. First, if you take a look at the SPX historically, we've had bull runs last longer and gain more on a percentage basis than this current one (I plan on doing a DD on that in the near future). Additionally, it makes sense for the market to be at these levels - earnings are consistency out of the park for most companies. Most importantly, however, is the FED's actions. The FED's QE policies can be described in no way but aggressive. The FED has been purchasing bonds and such since the 2008 recession, but has aggressively picked this up because of covid. The effect that this has is it makes bond prices go extremely high, which is why yields are so low. When yields are that low and inflation fears are persistent, investors can only put their money in the stock market if they want to make returns that outpace inflation. This is even more evident if you simply google "SPX FED balance sheet." Doing this will show you pictures of how the SPX moves directly proportional to the size of the FED's balance sheet. In conclusion, I believe that it makes complete and total sense that the market is at this current level. Are we due for a pullback in the near future? Probably. But is a giant looming correction coming? I don't think so in the least bit.
Inflation
Many people also say that inflation is what will destroy the stock market. I am not going to discuss whether I believe inflation is transitory or not because that will take up way too much time and is another issue in its own right. To analyze why I don't believe inflation would cause a market crash, let's look at several factors. First, let's look at history. The greatest inflation in the US was in the 1970's and 1980's. We didn't see a market crash in the least bit in the 1970's and in the 1980's we saw a very strong bull market. Next, lets assume for a minute that inflation does get a bit out of hand. If prices get out of control, the idea is that the economy will slow down because consumer spending will decrease, which will lead to lower earnings and fewer jobs. However, I don't believe this will happen because of the FED. The FED has shown us time and time again that it is here to support the stock market. If we see inflation, yes, maybe the FED will raise rates but the stock market has grown so accustomed to QE policies, I don't think the FED will just end them to stop inflation. Instead, I think that the FED will do something to stimulate the market in a different way - perhaps through more targeted bond purchases or something in that nature. The point is, I see absolutely no scenario where the FED just says "sorry baby" to the market to stop inflation.
Reverse Repo
Seeing people talk about how RRP transaction amounts being at records is an indication that the economy is going to crash is something that really annoys me because it shows an absolute and total misunderstanding of the subject. People who say this see that RRP total overnight transactions have been hitting records basically every week - this is completely correct, they have been getting into the trillions lately. People see this and immediately think MARKET CRASH. However, this shows a complete and total misunderstanding of RRP. The only time that RRP stats are a cause for concern is when the RATE goes up. When the rate goes up, it means that institutions see overnight lending as risky and want more compensation for it - we saw this in 2019 and the FED quickly addressed it. The current reason why RRP total transactions are rising because the FED is trying to put more liquidity into the system in order to spur economic growth - this is exactly what the FED wants to happen. The FED wants excess liquidity to be in the system. Economic crises often start when there is a credit crunch - i.e. large institutions are hesitant to lend because of some systemic risk or downturn. Reverse repo numbers show the exact opposite - they show that there is excess lending activity in the system.
Conclusion
Thanks for listening to my rant. I think that the economy is completely fine right now. Yes, there will probably be a slight correction in the near future due to delta concerns or just the general market cycle but I do not in the slightest bit believe that there will be a market crash in the foreseeable future. If you found this useful share it with friends, family, enemies, whoever. Happy investing.
Submitted September 13, 2021 at 08:47PM by MarginCallMelvin https://ift.tt/3k3QHzj
