FX.co ★ US stock market bubble doomed to burst, despite rally

US stock indexes continue to soar in spite of the 2-day setback. The uptrend goes on, ignoring high inflation, the enormous national debt, incomplete economic recovery following the pandemic, slumping economic growth in the third quarter, and QE tapering, with only minor corrections. As the US money supply increases, more cash is invested into equities, cryptocurrencies, or real estate.

Jeremy Grantham, head of the eponymous asset management firm, stated that the Fed ignores its own mistakes and continues to overstimulate the markets. According to Grantham, investing in stocks is highly risky in these conditions. An inflation rate of 6.2% or higher would have brought down any market since 1925. However, investors have extremely high confidence in the Federal Reserve, thinks Grantham. They believe Jerome Powell's statements about the current period of high inflation being "transitory". The British investor, who predicted the stock market crashes of 2000 and 2008, accused the Fed of repeatedly creating market bubbles. Grantham said that the current situation is a paradox - a bull market always requires low inflation. His statement may certainly be considered a cause for alarm.

More and more warnings about an impending bursting of the bubble have been coming in lately. Looking back at the start of the pandemic, we can see that major stock market indexes have been going up since then, despite the initial crash in February-March 2020. In a year and a half, the S&P 500 gained more than 150%, the NASDAQ - 160-170%, the Dow Jones Industrial Average - 20%. In the meantime, the economy significantly contracted due to COVID-19. Manufacturing was severely affected, and the service sector has yet to recover fully. This begs the question - what can sustain this stock market uptrend?