What Could Cause the Next US Stocks Bear Market?

Dear Reader,


The major US stock market indices keep making new historic highs. What could derail this record breaking US stock market rally?

I bet the most probable reason would just be overvaluation of US listed stocks, information technology stocks, especially. It should be similar with the dot-com boom and bust. Many people say that it was the Federal Reserve that popped the dot-com bubble. I have a different theory. During the dot-com boom many technology stocks did not even have revenue, let alone being profitable. Market participants realized that these stocks must be close to worthless, but the upside price action drew in even sophisticated investors in overhyped dot-com technology stocks. The incessant wave of money up to 2000 kept the market rally going. Sooner, rather than later the dot-com era stocks hit a valuation wall. People suddenly realized that US stocks simply are not worth what they are trading at back at 2000.

Now the case is quite similar. Investors will sooner rather than later realize that US stocks are overvalued. There can be various triggers. The most likely trigger this time around is again the Federal Reserve starting to hike the federal funds rate, again after a hiatus. The probable fall of technology stocks that will ensue after the Federal Reserve hikes rates would hurt the balance sheets of banks like Goldman Sachs, Morgan Stanley and JPMorgan Chase and that in turn will spread first financial contagion, than economic malaise first throughout the USA and then to the global economy. Of course, there could be other triggers like a sudden drop in real estate prices or recession in China, which could both separately cause a stock market crash in the USA and global stock markets.

In short, I believe the next US stocks bear market or a fall of more than 20% of the major US stock market indices will come in 2021.

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Petar Vladimirov Posledovich is not liable for any investment losses incurred by reading and interpreting blogposts on this blog and posts on social networks.

Conflicts of interest: I may possess some of the securities, currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Respectfully yours,

Petar Posledovich