bRisk of a bear market on the horizon. Inflation and rising yields should be watched carefully.
According to financial management service Morningstar, the current bull market is not due to the boom in the economy, but rather the outbursts of the latest bull market. Thus, the latter is doomed to die, but what will be the cause of this slowdown?
The pandemic crash and recovery would thus have been twists and turns of the bull market that began in 2010. A two-year bull market would therefore not look like the current market.
Normally, at the start of a bull cycle, investors are cautious because it is difficult to know ahead of time where the market will go. But right now, investors are risk-hungry, IPOs are plentiful, and indexes keep hitting new highs – all signs of the end of the bull cycle.
This increase is not in its final stages, however, according to the experts. Also, according to analysts, it’s safe to say that the chances of a recession in the next 12 months are slim. And if there is a pullback, it will be a buying opportunity.
The pitfalls of the bull cycle
What should put the final blow to the current bull cycle are inflation and rising interest yields. In the long term, inflation should encourage central banks to curb it, particularly by raising rates.
According to the two experts, the market should continue to do well, as long as inflation is manageable and central banks continue with their accommodative policy.
It’s hard to say, however, what kind of inflation to expect. Either it will be driven by demand or by costs. In the second case, inflation erodes profits and makes companies more cautious about hiring new people.
There seems to be some evidence pointing to this scenario, including the price of materials, making it more profitable to build large houses than small houses. Companies worldwide have also decided to revamp their supply chains to make them more resilient to shocks, which is helping to push cost inflation.
Shielding from a shock
The shock will depend on central banks and how they initiate their rate hikes. The Federal Reserve always gives a warning when it plans to change its monetary policy.
A rate hike is not necessarily problematic, but two factors exogenous to the economy could still have a big impact: the Delta variant and the containment that could result from it and a more pronounced slowdown in the economy.
However, barring a further shock, the bull market is likely to continue for a few months.
The volatility of the market can largely affect the retail investors’ mindset. It’s more than ever important to focus on the diversification of the assets. The Forex market shows unparalleled activity. If you aim to invest, make sure to check broker review to see the opportunities the company presents. Shielding an investment portfolio with varied asset types should be the focus of your strategy. No one can see the future but having a plan B in every situation is more than advisable.
Founder Dinis Guarda
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