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Markets are turning - has it bottomed out?

 


Why are the markets falling right now?

In order to be able to evaluate whether the current recovery phase is lasting or just a bear market rally, the reasons why the markets are currently being sold off must first be shown.

In addition to the persistently high inflation, the subsequent increase in interest rates is poison for the economy. Rising interest rates not only make the valuation of riskier assets such as cryptocurrencies or tech stocks unattractive, they also ensure that the money supply in the market grows more slowly. This makes money more expensive (supply-demand), which can lead to deflationary tendencies. Wall Street is therefore particularly afraid of mistakes made by the FED in interest rate policy.

In addition, there are fears that the general economic situation could lead to a recession. Inflation, rising interest rates, broken supply chains, lack of raw materials and the war in Ukraine. There are enough reasons for a recession.


Why the current rally is a bull trap

Wall Street is in a bear market. The above reasons are increasingly putting worry lines on investors' faces. However, small recovery phases, like the current one, are normal in bear markets. Although the Dow Jones was able to close a trading week in the black for the first time since the end of May, this does not change the reasons for the sell-off of many stocks. Company valuations are currently aligning with rising interest rates.


So you shouldn't be guided by the evaluation of old days, but must include the new circumstances. In times of rising interest rates, valuation standards such as P/E & Co are becoming more important again. Highly rated stocks such as Tesla, Cloudflare & Co must therefore adapt to the new circumstances. The recovery rally may therefore be short-lived.


Why the bottom has been reached

However, there are also signs that the bear market is coming to an end. On the one hand there is the argument "What is to come?"

The issue of inflation has markets firmly in its grip


War, inflation, rising interest rates, lack of raw materials, recession, broken supply chains. - What else is to come? Many investors are of the opinion that nothing can come now. However, this argument should be treated with caution, as there is always more to come.


However, following the argument, the FED also has the task of keeping the economy stable. As a result of the exogenous shocks mentioned above, the FED could tackle inflation by raising key interest rates a little more gently than originally planned. Neither the FED nor US President Biden can afford to send the US economy into a prolonged recession.

The same applies to the ECB, although its actions are even more restricted. Interest rates for financially troubled countries such as Greece or Spain have already risen to over four percent. If the ECB raises interest rates too aggressively, there is a risk of another euro crisis.


Conclusion

Currently, the only way to tell with a crystal ball is whether the recovery phase is beginning or whether this is just a bear market rally. The fact is, however, that central banks will not send the economy into a recession that lasts for years. In case of doubt, the fight against inflation would have to take a back seat.

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