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On Thursday (3) the Dow Jones fell by more than 800 points. Wall Street analysts said asset prices may be on the verge of a sharp decline, meaning Minsky’s time has come.
In recent months, world governments and central banks have taken more stimulus measures and the prospects for the new crown vaccine. The stock market has seen a period of strong rally since March. Although the new corona epidemic has not been resolved and geopolitical tensions continue to bring global economic risks, the S&P 500 and that Starck Index have repeatedly hit all-time highs, and the Dow Jones yesterday closed above the 29,000 mark for first time since February.
The sudden market crash after an unsustainable bull market is called the Minsky moment in this case. Ron William, a market strategist at RW Advisory, said in an interview Thursday that Minsky may have already arrived.
Ron William predicts that the stock market may fall as much as 20-30% or more. Investors should be aware that the stock market may go from a V shape to a W shape and test the lowest point since March.
Many factors that can cause the stock market to crash
Ron William said: “Recently, the stock market has gone up very little. Most of the rise in the US stock market. It is driven by the tech giants. This is a story about technology, Wall Street and Main Street. Each has its own merits. Look at the S&P 500. The index just broke through June’s high and has, in fact, stalled ever since.
Ron William said: “Next, the Russell 2000 small-cap index, which has a large number of zombie companies, is also lower than the June high point. In particular, if you look at the rest of the world outside the United States, the British stock market is basically very negative (still fell by more than 20 this year.%) “.
Liquidity and volatility are also historical indicators of possible drops. Ron William said: “Capital flows from the S&P 500 ETF hit a record. Look at the VIX Panic Index which also rises with the market, which implies a hedge against potential downside risks.”
William said that, coupled with the high valuation of US equities, the stock market’s usual low seasons in late August and early September, and the upcoming US election cycle, the market may also be looking for a slight correction, which can be healthy in the long run. After all, it will take several years to repair before the long-term bull market reappears.
Minsky moment refers to the fact that in the credit cycle, when the economy is in an optimistic phase, companies or investors are more willing to increase leverage, leading to increased speculative loans, and once borrowers start to experience interest rate hikes o The economy slows down then there may be a shortage of funds dilemma and eventually it may not be enough to pay the interest on the debt.
And when companies or investors have to sell assets for cash, if many people in the market also sell at the same time, the prices of high-level assets formed during the expansion stage may not be willing to assume. control, forming a series of spirals of assets. The drop in liquidity was meager, eventually leading to the asset price collapse.
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