Strong Bull Market Seemingly On The Cards
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Strong Bull Market Seemingly On The Cards

We Could Be In For A Strong Bull Market Followed By A Hard Landing

Consumer debt has reached unprecedented levels, a situation likely to impact the financial markets in 2024 significantly. Nevertheless, it is expected that central banks will continue to adapt their policies to maintain robust economic activity.

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The current economic landscape, as history suggests, may be setting the stage for a raging bull market followed by a challenging correction. A key factor in this scenario is the unprecedented level of consumer debt, which could have a significant impact on the market dynamics in 2024. Despite this, central banks appear committed to maintaining aggressive measures to sustain economic momentum.

In a notable move, the United States Federal Reserve has opted to maintain interest rates at their November meeting. These rates are at their highest since before the 2008-09 global financial crisis (GFC). The Federal Funds rate is now between 5.25-5.5%, a figure echoed in the United Kingdom, while the European Union experiences a record high of 4%.

This shift in monetary policy is a response to persistently high inflation across the developed Western world. The situation is so pronounced that experts like Citadel’s Ken Griffin foresee inflation persisting for a decade or more. Consequently, central banks are contemplating the possibility of prolonged higher interest rates.

This represents a significant shift from the past 15 years, which were characterized by exceptionally low interest rates and continuous borrowing across government, corporate, and individual levels. This environment fueled a robust rally post-GFC and supported equity markets during the worst global health crisis in over a century.

Investors, aware of these changing dynamics, are understandably apprehensive about the potential end of this low-interest-rate era. If historical patterns hold true, the current situation may be the precursor to a new economic cycle, marked by both growth and eventual downturn.

A historical parallel can be drawn from the period between 1993 and 1995 in the United States. Then, faced with challenges like the 1989 flash crash, high inflation, and geopolitical tensions, the Federal Reserve raised interest rates from 3% to 6%. Contrary to causing economic harm, this period initiated a remarkable phase of growth. Between 1995 and 1999, the S&P 500 and NASDAQ witnessed extraordinary increases in value.

This era was characterized by globalization, technological innovation, and a general sense of optimism, culminating in the development of the Internet. However, this phase was not sustainable, as evidenced by the burst of the bubble in 2002, leading to a significant loss of NASDAQ’s gains.

In essence, the economic scenario unfolding now mirrors past patterns, suggesting a cycle of growth followed by a potential downturn, a rhythm intrinsic to the nature of capitalism.

Presently, we find ourselves in the aftermath of a challenging phase marked by soaring inflation and elevated interest rates, all unfolding amid escalating geopolitical tensions in Europe and the Middle East. Despite these hurdles, the economy has shown remarkable resilience, navigating the tumultuous aftermath of the Covid-19 pandemic effectively.

Parallel trends can be observed between the dot-com era and the current cryptocurrency boom. It is highly anticipated that January will bring about approvals for multiple U.S. Bitcoin spot ETFs, potentially ushering in substantial institutional investments into this emerging asset class. This influx could trigger a surge in IPOs within and beyond the crypto sector, mirroring the explosive, yet volatile, growth seen in 1999.

While there are similarities to the 1990s, the prevailing factor aligning our current situation more closely with the 2001-07 market cycle is the issue of debt. As vividly illustrated by Margot Robbie from a bubble bath, the early 2000s witnessed an era of exceptionally reckless lending practices and the subsequent trading based on that lending, culminating in a globally transformative financial crisis.

Currently, alarming parallels to the 2008 financial crisis are emerging, with U.S. household debt reaching unprecedented levels and credit card loan delinquencies increasing at a rate not seen since 1991. Instead of adopting a more conservative approach to spending, U.S. consumers, after nearly two years of pandemic-related restrictions, have indulged in what’s been termed “revenge spending,” which is now starting to have significant repercussions.

While this shift in credit behavior might not lead to a collapse of the global banking system as it did in 2008, it remains crucial for the stability of the U.S. economy, which heavily relies on consumer spending. Moreover, the sustained period of high interest rates is likely to intensify the strain, as the burden of accumulating debts becomes more pronounced.

Addressing the most prominent issue, it’s not only the U.S. consumers who are accumulating debt. The pandemic has driven the U.S. government’s debt to over $30 trillion, a level previously thought to be inconceivable. This situation has led to credit rating downgrades for the world’s largest economy, a development that has been largely dismissed as inconsequential so far.

However, we are not yet at a pivotal moment comparable to the 2008 “credit crunch.” Despite signals from the bond market that might suggest otherwise, the U.S. economy is showing remarkable fortitude — particularly the U.S. consumer. Even with rising interest rates, there hasn’t been a decline in property purchases, and there’s no widespread trend towards spending cuts, as wage growth continues to outpace inflation.

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Difference between inflation rate and wage growth in the United States from January 2020 to September 2023. Source: Statista

Currently, there’s a sense of optimism in various markets, notably in the cryptocurrency sector, which is entering a new phase of growth. Investors are moving past the setbacks of companies like Terraform Labs, Three Arrows Capital, Celsius, and FTX, channeling their investments into alternative cryptocurrencies.

Thus, the likelihood seems to be in favor of a particularly robust bull market in the next couple of years, until the momentum inevitably wanes. The substantial debt accumulated by U.S. consumers is poised to become a critical issue, particularly if the environment of higher interest rates persists.

The key influencers in this cycle are poised to be the U.S. Treasury and the Federal Reserve. Their actions in March 2023 demonstrated a readiness to alter regulations to safeguard the banking sector. As the situation becomes more precarious, we can expect adjustments to the financial framework. However, it’s certain that what rises must eventually fall, a principle that remains constant in economic cycles.

We Could Be In For A Strong Bull Market Followed By A Hard Landing

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