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Will a market crash follow the latest crypto crash?

Bubbles in the US financial markets, bearish narrative from Wall St banks, NFTs, and supply chain constraints may signal a correction or crash is afoot.
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This article was originally published by Value The Markets

Bitcoin, Ethereum, and other cryptocurrencies are slipping once again. But elsewhere in the capital markets, concerns are rising that a crash or correction could be imminent. September is always a slow month for stocks and crypto, so is it all a fuss about nothing or time to get cash at the ready?

Is a stock market crash coming soon?

Volatility in crypto is commonplace, but stock market investors prefer stability. Since Covid-19 arrived, the US stock market has also endured volatility, but mainly to the upside.

Now, however, warning signals are flashing that a correction is increasingly likely.

Scary stuff

There are many signs the US stock market is heading for a crash or at least a 15% to 20% correction.

Deja vu from the run-up to the 2008 financial crash is loud and clear.

Back then, shipping rates spiked, as did CPI and commodity prices – all of which are happening now.

(The cost of shipping a container from China to California was $3,500 in August 2020, a year later, it hit $18,500.)

Technology has helped drive deflation in the past, but a serious lack of computer chips and rising shipping costs mean this is no longer the case.

Moreover, in an extremely bearish narrative, there is concern that the Mu version of Covid-19 is vaccine-resistant. If it mutates with Delta, the global situation will get much worse again.

With or without a worst-case scenario, many US stocks have reached unsustainable prices, and the S&P 500 is around an all-time high. This means a correction would be a natural progression in the order of things.

Wall Street worries

It’s not just bearish traders and doomsayers voicing concerns. Nerves are rattled among top Wall Street banks too.

Photographer: lo lo | Source: Unsplash

Payroll data from the US came in weaker than expected, leading several investment banks to cut their growth targets for this year.

Citigroup set the ball rolling in early August when it downgraded the US stock market to neutral. Its reason being the US stock market’s dependence on Big Tech stocks, which are increasingly under pressure.

Morgan Stanley followed on September 8, when it downgraded US equities to underweight and global equities to equal weight. Morgan Stanley predicts a pullback of 10% to 15% by the end of this year.

Lisa Shalett, Morgan Stanley’s Wealth Management chief investment officer, said a correction is likely based on mounting factors, including profit-taking, a decline in consumer confidence, rising interest rates, ongoing Covid-19 infections, and major geopolitical shifts.

Furthermore, high equity valuations, indexes near all-time highs, and weak seasonality are also causing concern.

Meanwhile, Deutsche Bank equity strategists said:

“The risk that the correction is hard is growing, valuation corrections don’t always require market pullbacks, but they do constrain returns.”

Dip, dip, dip… crash!

Last month Bloomberg noted that the S&P 500’s most significant dips occur mid-month. This is because it coincides with the expiration of monthly options. Afterward, the S&P 500 resumes its upward trajectory in a fairly consistent trend.

Ever since the pandemic’s arrival, the US stock market has performed against the odds.

Back in March 2020, the S&P 500 entered a brief bear market, dropping around 34%. It then proceeded to recover (and then some!) ever since.

It did endure a brief correction during election season when it fell around 7%, but it’s only endured short-lived dips since then.

This past week, however, things are taking a turn for the worse.

On September 3, the US jobs report came in far below expectations. While analysts expected nonfarm payroll growth to increase by 720k jobs, the actual figure was 235k. Since then, The S&P 500 and the Dow have been taking a daily tumble.

Investors are also worried about the Federal Reserve’s plans to ease fiscal stimulus (tapering) despite employment numbers slowing.

Recent Wall Street commentary

Equity strategist at Deutsche Bank (NYSE: DB), Binky Chadha, stated:

“Equity valuations at the market level are historically extreme on almost any metric. Trailing and forward price-earnings ratios, as well as valuation metrics based on enterprise value and cash flow, are all in the 90th percentiles,”

Canaccord Genuity

Co-head of research division Quest at Canaccord Genuity (TSE: CF), James Congdon, commented:

“Global stock markets may be entering a period of turmoil. Investors should favor stronger businesses with robust cash flows over weaker and more speculative companies.”

Goldman Sachs

Goldman Sachs (NYSE: GS), economics research strategist, Dominic Wilson said:

“While the broad U.S. market outlook is solid in our central case, we think peak cyclical optimism in the U.S. may be behind us.”

AJ Bell

AJ Bell (LON: AJB), Investment Director, Russ Mould said:

“Investors on the whole have enjoyed a fairly decent run this year, but now attention is turning from the post-lockdown spending splurge to how corporate earnings might fare next year. There is a sense that some of the market forecasts have been too optimistic and so there could be some share price disappointment unless we see GDP figures pick up and the COVID delta variant stops causing so much trouble.”

Morgan Stanley

Morgan Stanley (NYSE: MS), cross-asset strategist Andrew Sheets commented:

“We are going to have a period where data is going to be weak in September at the time when you have a heightened risk of delta variant and school reopening.”

Bank of America

Bank of America (NYSE: BAC), head of U.S. equity and quantitative strategy, Savita Subramanian, said:

“The S&P 500 has essentially turned into a 36-year, zero-coupon bond, if you look at the duration of the market today, it’s basically longer duration than it’s ever been. This is what scares me. The threat is that any move higher in the cost of capital via interest rates, credit spreads, equity risk premia, that’s basically going to be a huge knock on the market relative to the sensitivity we’ve seen in the past,”

S&P 500 one year chart
S&P 500 one year chart – Source: FactSet

Preparing a portfolio for a stock market crash

The main thing investors should remember is a crash or correction are short-lived. Never sell at the bottom. If anything, it can be a great buying opportunity. That’s why having cash at the ready gives you the upper hand during a correction.

However, quality cyclical stocks are often favored to crash-proof your portfolio, along with strong dividend payers. Popular sectors include healthcare, consumer staples, insurance, and utilities.

Reasons a US stock market crash or correction could be on the cards:

Many unprecedented events have been going on in the capital markets over the past 18-months. While the Reddit-fuelled meme craze of January is hard to beat, many other anomalies have been occurring, and it helps drive the narrative that this weird and wonderful world of stock market pandemonium could be heading for a crash.

bubbles in the market S&P 500
Photographer: Pawel Czerwinski | Source: Unsplash

Most of these unusual activities are unassuming or even laughable on their own but accumulatively could cause problems. Some of them look like mini bubbles in their own right.

Anomalies in the markets

  • Now many US stocks have reached unsustainable prices (Hundreds of stocks trading like Tesla (NASDAQ: TSLA))
  • Crypto volatility continues
  • Retail investors supercharged – Reddit’s WallStreetBets community continues to wreak havoc in targeted areas of the equity markets.
  • Gamification – Robinhood, Coinbase, and peers have made fractional trading accessible to the masses.
  • NFTs – Apes, penguins, kids artwork, photography, paint splashes, scribbles, and even digital rocks are selling for millions of dollars.
  • Trading cards – Pokemon, NFL, and all manner of trading cards are being exchanged for astronomical sums.
  • A flood of self-styled investment gurus and furus yelling “You’re not too late!” – reminiscences of the dot com bubble and the crypto bubble of 2017.
  • Insider trading – House Speaker Nancy Pelosi’s husband, Paul Pelosi, has been handsomely profiting from winning stock options trades. Meanwhile, after the media discovered Dallas Fed president Robert Kaplan held 27 stocks, funds, and alternative asset holdings valued at over $1 million each, he liquidated.
  • Tesla is a law unto itself. Tesla bears have been predicting its downfall for years, and it has continued to rise. Now it is a member of the S&P 500, it holds more sway in the financial markets. If Tesla were to crash, it would have a knock-on effect on pension funds, ARK Invest ETFs, and much more.

Supply chain disruption

Meanwhile, pandemic lockdowns have led to supply chain disruption, causing many commodity prices to rocket.

  • September has seen a lot of hype around the Uranium market. Canadian investment fund Sprott Asset Management LP has been buying up low-cost uranium on the spot market to hold long-term. Being an illiquid market, this has dramatically raised uranium spot prices. So far, the nuclear power industry is unperturbed, but there is a concern if the fund continues at pace, it could push up nuclear fuel costs long term. Near-term, a rise in uranium prices won’t affect fuel prices. Long-term, it could inflate electricity prices.
  • Other commodities making headlines are Aluminum, Steel, Oil, Natural Gas, Lithium, Wheat.
  • Geopolitical stresses – America’s withdrawal from Afghanistan and pulling missile defenses in Saudi Arabia is rocking international relations. The US is on shaky ground with Russia and China too. Many of the natural resources in demand are mined or sourced from areas of conflict.
  • According to the Wall Street Journal – the US Ports see shipping logjams extending far into 2022. Shipping volumes are already up 20% over last year’s record level. Volumes in August set a record for a single month. Low inventories and production caused by Covid don’t help.
  • Shortages in consumer goods are apparent and likely to get worse.
  • When metals and mineral prices go up, so do manufacturing costs. The Baltic Dry Index (BDI) tracks the cost of shipping bulk dry goods. It is showing global transportation costs at record highs.

Wall of worry

Monetary stimulus, record debt, and talk of Inflation, Stagflation, Reflation, are all adding to a wall of worry.

  • After Covid-19 hit in early 2020, the US government sent the money printer into overdrive. It needs to claw that money back, and tapering* is expected to begin soon. From tapering, it should move on to reducing its debt.

* When the FED tapers, it means slowing its asset purchases. The aim is to end monetary stimulus.

  • When US futures are trending lower, it indicates a pullback in the markets. There’s been a slight decline in September.
  • Concerns over a slower than expected economic recovery.

Raise the debt ceiling or default!

From mid-October, it’s expected the federal government will hit the national debt ceiling. Without a plan to raise it, the country may default. Republicans and Democrats are once again at loggerheads in how to handle it. The US defaulting on its debt would be a historical disaster. Any uncertainty will cause volatility in the markets. The consensus is on it being raised, but neither is a good look.

Finally, there are also the usual international worries out with fiscal control:

  • Natural disasters linked to climate change
  • Climate change pressures and the rise of ESG, which is not always as virtuous as it should be. This is creating an imbalance in certain areas of the market.
  • Rising Covid-19 infections

Reasons the bull run may continue

  • The dominance of deflation may well continue.
  • Many quality businesses are trading at reasonable valuations.
  • Tesla could continue to thrive.
  • Bitcoin, Ethereum, and crypto prices could steady.
  • NFTs could go mainstream as businesses adopt them as an added marketing tool and promotional prop.
  • According to National Geographic, laboratory studies show the Mu variant of the coronavirus may be better at avoiding the immune system but lags Delta when it comes to transmission and infecting cells.
  • Commodity price increases may be short-lived.

Investing is a long-term pursuit, and it’s important to step back and view the bigger picture. For the most part, businesses are expected to continue to run. Therefore, choosing strong companies to invest in long-term is a good strategy.

Technological breakthroughs may solve all our carbon worries, and Covid-19 may soon disappear.

If there is a major market crash or correction, we can rest assured it will be followed by a recovery. So, don’t forget to buy the dip.

The post Will a market crash follow the latest crypto crash? appeared first on Value the Markets.

Economics

Weekly investment update – Transitory gets a boost

Recent rises in Covid cases are being monitored closely, not least for the possibility that a pickup in caseloads may affect reopening plans and crimp…

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Recent rises in Covid cases are being monitored closely, not least for the possibility that a pickup in caseloads may affect reopening plans and crimp consumer confidence, capping the economic recovery. Brighter news from the US came this week in signs that inflationary pressures are now easing, vindicating the view of many central bankers.

Covid-19 update

Globally, daily new Covid cases have continued to ease and are now around 550 000 per day, led by an easing in infection rates in Asia and Africa over the past week.

In the US, infection rates have receded marginally to around 150 000 new cases a day, with hospitalisations reaching a plateau.

In China, after two weeks of close to zero transmissions, locally transmitted cases have risen, albeit just in one region. The country’s zero-tolerance approach to Covid-19 presents a downside risk to economic growth if transmissions pick up more broadly.

This point was underlined recently by the Singapore government’s decision to pause reopening plans after an increase in the caseload among the country’s 80% vaccinated population.

The Delta variant has already had a negative impact on consumer confidence and hiring in the US. This may well extend to August retail sales, which is scheduled for release on 16 September.

Sentiment among US consumers is expected to remain subdued through September. While infection rates appear to have eased, a more sustained reduction is probably needed before confidence rebounds.

Pace of US inflation slowed slightly in August

Data published on 14 September showed US consumer prices rose at a more moderate pace in August, suggesting that inflationary pressures associated with the economic reopening from Covid lockdowns are easing slightly after inflation reached a 13-year high in July.

The US consumer price index (CPI) rose by 5.3% in August from a year ago — just below the 5.4% reported previously. This was in line with the 5.3% consensus forecast. Month-on-month, price gains slowed to 0.3%. That is a significantly slower pace than the 0.9% jump between May and June, and a fall from the most recent 0.5% rise from June to July.

Core CPI (excluding volatile items such as food and energy) also decelerated. The monthly pace fell to 0.1%, marking the smallest increase since February. Over the last year, core inflation was up by 4% after a 4.3% rise in July.

Looking more transitory

The slowing of US inflation in August reflects a partial unwind of the large increases in the prices of used cars, transportation and hotel accommodation in late spring.

This supports the view that the inflation surprises of a few months ago would, in the language of the US Federal Reserve, prove ‘transitory’. As such, it will be welcomed by Fed chair Jay Powell.

Back to low-flation?

Few, however, ever believed that prices would continue to rise at nearly 1% a month indefinitely. The debate has always really been about what rate inflation would return to once the large demand/supply imbalances in sectors such as consumer services abate.

The real question is:

whether the US will see sustained inflation near or above 3% a year, or will the low-flation forces that dominated during the years before the pandemic return?

A key part of the answer to this question is housing prices. Housing is a major part (40%) of US core CPI and is correlated with the business cycle. The high weight means relatively small shifts in this component of US inflation can move the needle on the overall inflation outlook.

The Fed is hoping that inflation ultimately settles at a level a little above 2% once Covid moves into the rear-view mirror. A slightly higher rate of housing-related inflation than that seen before the pandemic might be a necessary part of that. Whether that slightly higher rate turns out to be 3.75% a year or 4.25% will matter a lot.

Supply chain distortions

In the near term, there are clearly still supply chain effects at work in the data. Assembly of new cars has been severely affected by a shortage of semiconductors, which has forced up the price of both new and used cars. Various other durable goods prices (e.g., furniture, TVs and the like), have risen due to Covid-related plant shutdowns in Asia and transportation cost pressures.

These factors look set to support higher inflation for at least several more months. Higher vaccination rates will be a key part of resolving these production issues. 

News from the ECB

At its 9 September council meeting, the European Central Bank announced a moderate slowdown in the pace of asset buying under its pandemic emergency purchasing programme (PEPP), in line with market expectations. President Lagarde reiterated the view that inflationary forces in the eurozone were temporary in nature.

Details on the future of the PEPP are expected in December. The programme may end next March,  perhaps replaced by an expanded and more flexible asset purchase programme.

With prolonged monetary accommodation maintained by the ECB, eurozone front-end interest rates are well anchored.


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk. 

Writen by Andrew Craig. The post Weekly investment update – Transitory gets a boost appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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Economics

What is the Federal Reserve?

The Federal Reserve is the central bank of the United States and is considered to be the most powerful financial institution in the world.
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The Federal Reserve, also often known as the Fed, is the central bank of the United States and is considered to be the most powerful financial institution in the world. The Federal Reserve was founded in 1913 to provide the US with a safe, flexible and stable monetary and financial system.

The purpose of a central bank is to create a financial institution that has privileged control over the production and distribution of money and credit for the nation or group of nations that it serves. Other examples of central banks include the Bank of England, the European Central Bank and the Swiss National Bank.

How the Federal Reserve works

The Federal Reserve is composed of 12 regional Federal Reserve Banks that are each responsible for a specific geographic area of the US. They are:

  • Federal Reserve Bank of Boston
  • Federal Reserve Bank of New York
  • Federal Reserve Bank of Philadelphia
  • Federal Reserve Bank of Cleveland
  • Federal Reserve Bank of Richmond
  • Federal Reserve Bank of Atlanta
  • Federal Reserve Bank of Chicago
  • Federal Reserve Bank of St. Louis
  • Federal Reserve Bank of Minneapolis
  • Federal Reserve Bank of Kansas City
  • Federal Reserve Bank of Dallas
  • Federal Reserve Bank of San Francisco

There are two main objectives of the Federal Reserve, to foster economic conditions that achieve stable prices and maximum sustainable employment. The duties of the Federal Reserve can be further categorized into four key areas:


The Federal Reserve was founded in response to the financial panic of 1907. Prior to its inception, the US was the only major financial power without a central bank.


  1. Conducting national monetary policy by influencing monetary and credit conditions in the US economy to ensure maximum employment, stable prices, and moderate long-term interest rates.
  2. Supervising and regulating banking institutions to ensure the safety of the US banking and financial system and to protect consumers’ credit rights.
  3. Maintaining financial system stability and containing systemic risk.
  4. Providing financial services, including a pivotal role in operating the national payments system, depository institutions, the US government, and foreign official institutions.

The organizational structure of the Federal Reserve consists of seven members on the Board of Governors. Each is nominated by the president and approved by the US Senate. A governor can only serve a maximum of 14 years on the board and their appointment is staggered by two years.

It is also dictated by law that appointments of governors must represent broad sectors of the US economy. In addition, each of the 12 Federal Reserve banks has its own president.

The Board of Governors are responsible for setting reserve requirements, the amount of money banks are required to hold to meet the demands of sudden withdrawals. They also set the discount rate, which is the interest rate the Federal Reserve charges on loans made to financial institutions and other commercial banks.

Central banks across the world play an important role in quantitative easing to expand private credit, lower interest rates and drive investment and commercial activity through FOMC decision making.

Quantitative easing is used to stimulate economies during periods of uncertainty such as recessions when credit is thin on the ground. An example of when quantitative easing was used was during and following the 2008 financial crisis.

Advantages of the Federal Reserve

The advantages of the Federal Reserve include:

Provides stability

During times of recession and periods of uncertainty, the Federal Reserve can help remove panic and provide help to financial institutions and their depositors in times of severe economic crisis.

Good risk containment system

The Federal Reserve regularly runs checks on the nation’s banks and financial institutions. It runs stress tests and reviews financial statements to make sure that the public is dealing with institutions that are in good financial standing, and are not overloaded with risk.

Disadvantages of the Federal Reserve

The disadvantages of the Federal Reserve include:

Not completely transparent

Many believe that private interest and lobby groups have significant influence over the Federal Reserve, allowing individuals to benefit rather than actions that benefit the whole society.

The post What is the Federal Reserve? appeared first on Value the Markets.

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Economics

What is Fundamental Analysis?

Fundamental analysis is a method that is used to measure a security’s intrinsic value by examining and analyzing related economic and financial factors.
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Fundamental analysis is a method that is used to measure a security’s intrinsic value by examining and analyzing related economic and financial factors. These can include macroeconomic factors such as the state of the economy and current industry conditions to microeconomic factors like how effectively a company is managed.

The purpose of fundamental analysis is to determine a number that investors can compare with a security’s current price to inform them whether it is overpriced or underpriced. Fundamental analysis is considered to contrast technical analysis which focusses on historical market data including price and volume.

How fundamental analysis works

Experienced fundamental analysts can identify buy or sell signals, calculate a security’s intrinsic value and assess factors that could impact the value of an asset.

Even at the most basic level, a fundamental analysis strategy will include the following primary factors to assess the security:

  • The structure and revenue of the company
  • Growth of revenue in recent years
  • Profit made by the company
  • The debt structure of the company
  • The company’s rate of turnover
  • Employee management and managements approach to employees

Fundamental analysis can help investors determine whether to buy or sell an asset by looking at public data.


Types of fundamental analysis

The fundamental variables used in fundamental analysis can be categorized in two ways: quantitative and qualitative.

Quantitative fundamentals

Quantitative fundamentals are typically any variables that can be measured or expressed in numbers. This type of fundamentals is useful if you are comparing securities in the same asset class or industry. Examples of qualitative fundamentals include P/E ratios, revenue and current liabilities – all of which can be found in a company’s financial statements.

Qualitative fundamentals

Qualitative fundamentals are anything that cannot be measured or expressed in numbers. These can include trends, a country’s media presence or a company’s board of directors. These factors are driven by opinion and can be harder to compare.

Although each requires a different approach, both are equally as important to complete a full analysis of a company’s share price.

The approach fundamental analysts can be either top-down or bottom-up. The top-down approach concentrates on the qualitative fundamentals first and then digs deeper into the numbers, whereas a bottom-up approach looks at the quantitative fundamentals first and then at the macroeconomic and microeconomic factors.

Advantages of fundamental analysis

The advantages of fundamental analysis include:

Detailed analysis

Fundamental analysis looks at both the financial performance of a company as well as other factors that could affect the value of its share gives a comprehensive and detailed analysis, enabling investors to make informed decisions.

Long-term benefits

This type of analysis can identify long-term opportunities for investors as it considers multiple areas that can impact the stocks and securities value.

Can highlight early warnings

Undertaking fundamental analysis can highlight early warnings and provide insights into the effect of fiscal and monetary policy and the direction of global markets.

Disadvantages of fundamental analysis

The disadvantages of fundamental analysis include:

Can be time-consuming

The process of conducting fundamental analysis can be time-consuming. As a detailed method of analysis, it involves a variety of approaches that can take more time than other analytical methods.

Missed opportunities

Following on from the previous point, the amount of time fundamental analysis takes could lead to missed opportunities where an investor needs to make a quick investment decision. In these instances, investors should look at alternative analysis methods.

Subjective analysis

As this method of analysis considers all the micro and macro factors together and analyzes them simultaneously, it can become complicated and subjective. Placing a numerical value against different factors will usually be a combination of experience and personal biases.

The post What is Fundamental Analysis? appeared first on Value the Markets.

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