Stock markets globally have experienced a correction in recent weeks; however, they are still in the midst of a major bull run. This has been a very long period of growth which was born from the ashes of the financial crisis.
Indices across the world have reached record highs, easily surpassing the highs from the dot.com bubble. As such, let's reflect on if this could be a case of history repeating itself. Or is the tide turning and we are about to find out who's swimming naked.
🙈 Policies
Most of this market's growth is a result of the central bankers spiking the punch bowl.
The rock-bottom interest rates in developed economies along with quantitative easing have caused a boom in asset prices.
Loose monetary policy has supported borrowing and provided consumers and businesses with greater financial flexibility during a period of uncertainty. As such, it is understandable why there has been a bull market, with policy action being a key catalyst.
🙉Different this time?
While most investors don't believe the world is about to experience a sudden change, there is a risk that are overly optimistic.
Take the US for example, investors have priced in significant growth as a result of President Trump’s lower taxation and higher spending policies. This could lead to disappointment if those policies are unable to have their desired effect and lead to higher inflation.
Also, the FANG stocks (Facebook, Amazon, Netflix, and Google (now Alphabet, Inc.)) and a number of tech stocks now trade on exceptionally high valuations. While they generally dominant in their fields, regulatory change or a change in consumer tastes could easily make their current valuations seem excessive.
🙊 Takeaway
The current bull market does feel as indulgent as the dot.com bubble; however, there is do denying that asset prices are grossly inflated.
In the late 1990s, it felt as though growth was a given and it feels like we are there again. After so many years of rising share prices, the same feeling begin to creep into investor attitudes today.
As such, reviewing your portfolio of any weakness, exitting overvalued positions and keeping some cash on hand to take advantage of potential opportunities could be a shrewd move.
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As long as the global stock markets are manipulated by algos, the bull run will continue despite the insane valuations.
Maybe, but the algos don't control the liquidity of capital markets. And the increasing cost of borrowings is what I'm calling out as the main risk.