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With inflation soaring to the highest level in 40 years, the yield curve flattening, and economic conditions worsening, the U.S. stock market is not prepared for what is coming next. The carnage has already begun, with some investor favorites such as Rivian falling by 80 percent in a matter of days. But still, traders keep desperately trying to fuel the bubble and push valuations to extraordinary levels. Unfortunately, those who are thinking that the downfall is over will be caught by surprise once they realize that, under the surface of the market, the bullish trend is starting to reverse.
The last Consumer Price Index report carried a hidden message, signaling trouble for the bond market. Yields across the curve are dropping, with the two-year rate declining from five base points to 65 base points. The 10-year also is plunging from around four base points to 1.45%. This comes as a surprise to most investors who thought that inflation would fade by itself and expected a strong economy. The flattening yield curve, with the front-end rising and the back-end falling, in addition to higher inflation expectations, tells us that the bond market is getting exceedingly worried about an economic slump, or even worse, the growing probability of an imminent recession.
Another serious issue is that financial conditions are tightening because the Fed has announced that it will start tapering its bond purchases and rising interest rates before the end of 2021. And when the financial conditions index goes up, it sparks a lot of volatility in the stock market. This is the nightmare scenario that led the Fed to decide to accelerate its tapering on November 26 due to scorching hot inflation, the threat of a global economic slowdown, and at a time when the bond market is concerned about a depressed growth for the U.S. economy.
While indexes are either peaking or within a few percent of their peak, the most speculative areas of the market are already in bear market territory. Top-tier investors are shifting their portfolios away from risky assets and looking for forms of wealth protection, given that there is much more weakness to come. Speculative market sectors such as tech, growth stocks, and crypto are under serious pressure as the current valuations are significantly higher than their historical average. Stock market peaks are typically a process rather than an event. They often happen after some areas of the market have already suffered large pullbacks. And that’s precisely what we’re witnessing right now.
Therefore, with the yield curve flattening, global growth slowing, the Fed starting its taper, and financial conditions tightening, the time for a massive stock market sell-off has arrived and the vast majority of market experts are saying that the countdown for a brutal crash has begun. A recent survey conducted by Bankrate found that most market veterans agree that an up to 80 percent correction is coming. Bankrate’s Fourth-Quarter Market Mavens survey exposes that 70 percent of analysts think a stock market crash is looming, and it also explains why these experts think so.
Bankrate’s survey showed a broad-based belief that the S&P 500 Index would catastrophically drop in the near term. The study found that a staggering 70 percent of respondents said the market is overdue for a sizable crash any day now, while 10 percent said that a crash will happen within the next year, and 20 percent of respondents said they didn’t know or provided another response. There are many reasons why these insiders are expecting the market to collapse. The most cited, of course, are rising interest rates and the overvaluation of stocks. Since last year’s sell-off, the S&P 500 has recorded an almost uninterrupted run, but the true growth of many companies isn’t keeping up with the pace of the rise of their stock prices.
Similarly, Jim Paulsen from The Leuthold Group is predicting a major pullback to rattle investors due to high valuations and less accommodative Federal Reserve policies. “We are way overdue for a correction, and we’re going to get one,” the firm’s chief investment strategist said in an interview with CNBC last week. “I would be trying to diversify away from the S&P 500, which I think might take the brunt of it,” he added. Needless to say, that isn’t good news for the stock market. At the current stage, all of the pieces are starting to fall into place, and it has become a matter of when the market will finally break down. An 80 percent drop is coming. The time has come for a devastating stock market crash. And the next pullback is going to be the most painful we have ever witnessed in modern history.