Excessive optimism makes financial markets vulnerable to downturns, and the fear of missing out (FOMO) may lead to a painful crash for many. Here are the key warning signs.
A market crash is on the horizon, and it could have painful consequences for many investors. Excessive optimism has left financial markets vulnerable, and the pervasive fear of missing out (FOMO) may drive a sharp and painful downturn. Here are the warning signs.
The stock market is showing clear signs of irrational exuberance. The euphoria sparked by Trump’s victory in the November 5 election is pushing the market to increasingly unstable heights. Driven by FOMO, investors are overlooking critical warning signals, such as excess liquidity and overly bullish sentiment, which could lead to a sudden and severe correction.
The current climate reflects characteristics of historical speculative bubbles, as described by experts like Robert Shiller and Jeremy Grantham, where excessive optimism has historically led to market crashes. For many, this could mean significant financial pain.
Signs of an Imminent Market Crash
The S&P 500 index has reached a record high above 6,000 points, up 26% since the start of the year. According to Nobel laureate economist Robert Shiller, when markets are propelled by irrational exuberance and emotional behavior, corrections tend to be more severe. Jeremy Grantham, a veteran investor known for predicting the 2008 financial bubble, also believes that current market trends are marked by speculative behavior and overvaluation.
Historically, an environment of excessive enthusiasm and stock valuations disconnected from fundamentals has often preceded significant market corrections.
Over the past year, each market dip has been met with buying, perceived as an opportunity rather than a warning. Financial analyst Mark Hulbert highlights an impending market crash, citing the behavior of the average recommended equity exposure among short-term stock market timers.
The steady rise in the Hulbert Stock Newsletter Sentiment Index (HSNSI) with each market dip signals a potentially dangerous increase in equity exposure, suggesting a higher risk of a sudden, deep, and painful collapse for many investors.
Which Assets Could be Most Affected by the Collapse
Stocks, commodities, and Bitcoin have been the most profitable investments of 2024, with respective returns of 26%, 25%, and 107%. These asset classes continue to surge, driven by heightened demand and limited supply. However, according to Hulbert’s analysis, some of these assets are already displaying signs of excessive optimism.
The current environment appears dominated by unprecedented speculative activity across multiple asset classes that have historically shown little correlation. For example, gold has reached record highs despite an environment of declining inflation and high real interest rates, with an unusual positive correlation to the stock market.
Bitcoin, too, has entered a phase of irrational exuberance, reaching new all-time highs near $90,000. However, an analysis by IntoTheBlock reveals that Bitcoin’s Market Value to Realized Value (MVRV) ratio may indicate a market peak.
| DISCLAIMER The information and considerations contained in this article must not be used as the sole or main basis for making investment decisions. The reader retains full freedom in his or her investment choices and full responsibility in making them, since only he or she knows his or her risk appetite and time horizon. The information contained in the article is provided for information purposes only and its disclosure does not constitute and should not be considered an offer or solicitation to the public to save. |
Original article published on Money.it Italy 2024-11-12 18:42:27. Original title: È in arrivo un crollo sui mercati. E sarà doloroso per molti
