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The Stock Market May Be Near Breaking Point

By Michael KramerMarket OverviewApr 22, 2022 05:28AM ET
www.investing.com/analysis/the-stock-market-may-be-near-breaking-point-200622690
The Stock Market May Be Near Breaking Point
By Michael Kramer   |  Apr 22, 2022 05:28AM ET
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This article was written exclusively for Investing.com

The last time mortgage rates were around 5%, the dollar index was over 97.50, oil was trading at over $75, and the 10-year rate was around 3%. That was in the fall of 2018 when the Fed was conducting quantitative tightening and increasing rates, which was quite literally when markets broke.

The S&P 500 plunged by around 20%, and the Fed had to back-peddle from rate hikes. It first held them steady and then had to cut rates and restart QE by the fall of 2019.

The Last Time The Market Broke

Just four years later, we again have mortgages rates over 5%, the dollar index is at 100, oil is trading over $100, and the 10-year rate is approaching 3%. On top of that, the Fed is now embarking on an even bigger rate hiking cycle and is very likely to conduct quantitative tightening at double the pace of the 2018 version.

If the markets broke in 2018, and arguably now they are worse, what will make this time around any better for markets? Rising oil prices, higher rates, and a stronger dollar will weaken global growth prospects, which should work to reduce inflation.

A Greater Strain

Much of the surge in oil is due to the war in Ukraine. However, the more prices stay high, while nations are losing purchasing power due to the stronger dollar, the harder it will be to sustain economic growth. We have already seen some of the effects of this—the IMF recently slashing its full-year 2022 global growth projections to 3.6%, from over 4%.

These higher prices will slow growth even in the US, with higher rates and energy prices making it more expensive. On top of that, the effects of higher rates will also work to tighten financial conditions, reduce the amount of leverage in the overall stock markets, and target asset prices overall.

The effects of this may already be showing up, and the Fed has only just begun. FINRA margin balances have fallen sharply from their October 2021 highs of $935 billion to $799 billion. As rates rise and financial conditions tighten further, leverage levels in the market likely will only fall more over time.

A U-Turn

The goal of this tightening policy, which is sending rates higher, is clearly to get inflation down. But it may very well be the case that the impact on demand may be more significant than what is intended. After all, look what happened just four years ago when the Fed had made a complete U-turn from running off the balance sheet and raising rates regularly to one where there was a pause just a month later, which led to rate cuts a few short months after that.

It seems likely that this ends in a similar way, with the Fed able to get a few rate hikes in, but the pain of higher rates, higher energy prices, and a reduction in leverage becoming too much for the markets to handle.

It may come down to just how much the economy can handle at one time. One of these changes may be enough, but when they all come together, it may be just way too many. It may be even more than what is needed to get inflation to break. It may even mean the Fed has to do a major U-turn faster than anyone expects.

The Stock Market May Be Near Breaking Point
 

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The Stock Market May Be Near Breaking Point

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Comments (28)
William Smith
William Smith Apr 25, 2022 5:54AM ET
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It's past a breaking point. An anti business anti energy and totally socialist administration is the coup de grace. A depression will soon envelope the world and China's yuan will become the worlds reserve currency causing the US standard of living to drop 70% in the next decade.
Murali Krishna
Murali Krishna Apr 24, 2022 10:41PM ET
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Where is Dr. Arnout? He was misleading all on or about March 30, 22 with his cockamamie analysis but called EWP analysis that SP 500 was heading for new High. I had to chase him away. He has since been missing. Where is he?
Tims Mopheme
Tims Mopheme Apr 24, 2022 4:01PM ET
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The reason why america is forced to crash the stock on 6 may is because Russia and China and now Israel have pulled out of USD RESERVE The dollar has to boosted through interest rate hikes of more than 50 basic points to cover over $7 trillion lost during Russia Sanctions So theyre cowards Theyre have to crash nas100 from May ! To be under 10 000
Gershom Zvi
Gershom Zvi Apr 23, 2022 3:02AM ET
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Infrastructure bill just printing printing money for nothing
Tims Mopheme
Tims Mopheme Apr 23, 2022 3:02AM ET
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Na youre wrong bro its Russian pulling out of the US dollar that pressurizes the Fed interest rates hikes
William Smith
William Smith Apr 23, 2022 3:02AM ET
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Infrastructure madness has helped fuel inflation which any fool could see coming.
Jeff Page
Jeff Page Apr 23, 2022 2:56AM ET
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Much of the surge in oil was taking place well before Ukraine. Is Ukraine the reason WTI is down? Look to Powell and Biden for global problems and a recessionary/inflationary issues. Up next, food shortages!
Pilot TwoFive
Pilot TwoFive Apr 23, 2022 2:56AM ET
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Biden doesn’t even know what day it is. A group of uneducated millenials are running the country into the dirt. Nov is going to be epic. Markets will roil for the next 3 years then back to bull
John Lysek
John Lysek Apr 23, 2022 2:56AM ET
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Bro, it sounds like you really don't understand how a global pandemic can drive up prices. Hint: Inflation and prices are up everywhere, surprise!
Mohd Izhar Muslim
Mohd Izhar Muslim Apr 22, 2022 8:23PM ET
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Thanks 💯
Daniel Clavijo
Daniel Clavijo Apr 22, 2022 1:59PM ET
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Permabear selling emotions here. The 2018 correction recovered in 4 months. But in the article seems like the end of the world.
Rise Unlimited
Rise Unlimited Apr 22, 2022 1:49PM ET
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Sells everything every week up here from wayyyyy below- 2010 Buyer
Jacques Bughin
Jacques Bughin Apr 22, 2022 12:58PM ET
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Why are u still writng? The only conclusion is that it will go down
Jack Peterson
Jack Peterson Apr 22, 2022 12:08PM ET
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The excessive exuberance of the last 15 years is now here to claim its victims and some cases its winners!! Buckle up and put your helmet on, we are in for a rough ride
 
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