Looking at stock markets, it seems pretty amazing how they continue to set all-time highs. They’ve shrugged off any number of pieces of negative news, from trade war to actual armed conflict to global health crises. But in the back of everyone’s minds, we’re all wondering how long that will continue to be the case.
The recent melt-up in stock markets has been fueled by the Federal Reserve, which has added over $400 billion to its balance sheet over the past several months. That money seems to have gone directly to Wall Street, as stocks have been on a tear ever since. No one would have expected the Dow Jones to get to 29,000, yet here it is, and at this point there aren’t too many people who would be surprised to see it hit 30,000. But if it does, will it keep going?
It’s hard to imagine a credit-fueled stock bubble going much further. The Fed has promised to continue purchasing Treasury securities through at least the second quarter of this year. That means that another several hundred billion dollars of new money will be entering the financial system. Assuming nothing happens to counteract that easy money, Dow 30,000 seems easily attainable.
But when the Fed decides to end or taper down its bond purchases, that supply of easy money will dry up, and with it so will the stock market rally. And that’s in a best-case scenario. In a worst-case scenario, things like the Chinese coronavirus, more tariffs, or a slowing economy will outweigh the stimulus the Fed is trying to provide. That will only hasten the oncoming recession.
If you’re trying to eke every last penny out of the stock market melt-up, you’re at real risk of losing big when stock markets crash. It’s a matter of when, not if, stock markets crash. And there’s a high likelihood that it will be this year, so get prepared.