It’s still not clear if China will start selling US bonds. In fact, it could be that China can’t help but buy more US bonds. As an exporting nation China earns hundreds of billions in foreign currency, particularly US dollars. Over time, they’ve piled up trillions in USD. What can they do with all these dollars?
From a purely technical (charting) perspective, US stocks are due for a bounce. Like the price of bitcoin early last week, the S&P500 is now ‘oversold’. The important thing to watch here is how far the bounce takes stocks. If, for example, you see the market rally back to around 2,700 points and then run out of steam, I think you’ll see stocks subsequently fall to new lows.
If US bonds potentially rise to 3.5–4%, the ASX 200 could potentially drop 18%. That’s assuming the yield premium for holding stocks is around 2.5%. This kind of drop probably won’t happen over days or weeks. It’s more likely to happen over months. And in that time, I’m betting volatility will be here to stay. But rather than lament over a lumpy market, it’s really a time to celebrate.
TripAdvisor Inc.’s [NASDAQ:TRIP] price has increased drastically since Tuesday. The stock shot up by more than 14% yesterday. It has only continued today.
You’ll read a lot of sweeping statements now as markets correct, but markets are just fully extended right now. Stock market corrections are completely normal. So just be wary when reading some analyst who suggests things are on the verge of collapse. Concerns over inflation and rising interest rates may have sent stocks tumbling, but underneath it all, the US economy remains strong.
We could be at the start of a shift in investor sentiment. It’s a shift that now acknowledges P/Es are too high, given we’re in a rising nominal rate environment. So while rising rates won’t derail the economy, they will derail investor sentiment. Which means P/E contraction will be the driving force behind this correction. So how should you invest accordingly?
Unfortunately, such quick and easy gains give many investors an unrealistic view of how markets work. This is what changes the psychology of markets and sees money pour into stocks, pushing them higher. This is exactly what happened in crypto markets at the end of last year. This is how bubbles form. Bubbles are a result of belief. Busts are a result of disbelief.
There’s a pecking order when it comes to investing. A hierarchy of opportunity. It’s a pyramid of power, carved out in the stone of regulation. The system is set up so that you aren’t allowed to invest in the early stages of the biggest opportunities. You have to be a sophisticated investor. That is a person rich enough to get a chance to make gains. Until now.
The risk is that that all this printing of money leads to inflation. I think that’s what the bond market is reacting to now. However, over the past two years there has been no volatility at all. The highly leveraged global economy has been good for global stocks.
There is clearly some FOMO going on in global stock markets right now. That is, Fear of Missing Out. Missing out on what, though? Buying stocks on high price-earnings multiples at what appears to be the end of the cycle? The caveat here is ‘appears’. No one knows where the end of the cycle is. You just have to use your common sense.