The three US stock market indices – Dow Jones, NASDAQ, and S&P 500 – concluded Thursday with a new rise. In essence, the indices have been indicating an increase for the sixth day in a row, so there is every reason to anticipate that the corrective against the correction continues. This is hardly surprising because the next Fed meeting will take place next week, and with it, a new rise in the key rate. We have mentioned repeatedly that no instrument can consistently travel in one direction. Stock indices and stocks are no exception. Even if the fundamental basis is a failure, corrections should nonetheless happen from time to time. And now we are observing one of them.
At this moment, the essential basis is fairly simple. It all boils down to the reality that the Fed continues to raise the key rate at a very high rate, something the markets have not seen for decades. The pace of inflation has not been able to slow down or even stop, despite the fact that the US regulator has already hiked the rate to 1.75 percent. If a couple of months ago, many analysts and members of the Fed talked about the 3.5 percent rate as the maximum, James Bullard is already hinting at a possible increase to 4 percent. And if Bullard shares this opinion, then some other members of the Fed may back him because it was Bullard who was right in the end. The head of the St. Louis Fed remarked at the beginning of the year that it was vital to raise the rate to the maximum achievable value as soon as possible to have a shock impact on inflation. After that, it will be possible to lower the rate to a neutral level or slightly higher. Bullard suggested hiking rates without hesitation, but many monetary committee members did not want to take such an aggressive stance. What came out of it, we can all see very well. Rates are already rising by 0.75 percent every month and a half, and inflation has been growing and climbing. Thus, we have absolutely no doubt that the key rate will grow due to the overall program to tighten monetary policy to 4 percent, and maybe even higher. Naturally, all this is terrible news for stocks, cryptocurrencies, and other risky assets. Simply because the demand for them will continue to drop, as capital will move into the safest assets with decent yields. Such as treasury bonds and bank deposits. Of course, this does not mean that all investors will sell all stocks and buy bonds. But any flow of capital from one market to another entails a decline in demand for the assets of the first. Consequently, demand is declining, but supply is not expanding. Since the current Fed rate is not even 50 percent of the same as the likely ultimate one, the US stock market still has a lot to fall. We believe that it will still decrease by at least 20 percent.