The great volatility in the financial markets poses great risks for investors
On Monday, February 5, the main US indices experienced their worst drop in points in a single day, in the history of Wall Street. The situation occurred after the market had a bullish behavior, almost uninterrupted, since the financial crisis of 2009.
The momentary crash ignited the alarms of the analysts, who had recently increased the forecasts of unfavorable scenarios. Even, it was considered that this market would be close to a high valuation bubble.
There is a possibility of a double bubble explosion
Among the analysts, who commented on this fall, is the winner of the Nobel Prize in Economics, Paul Krugman. The Nobel stated that the standard indicators are above normal levels, but individually they are not as overvalued as in the year 2000.
However, on this occasion, Krugman believes that the stock and real estate markets in the US they are overvalued at the same time, which increases the possibility of a double bubble explosion like the one that occurred in Japan at the end of the 1980s.
On the other hand, the growth of the US economy has occurred amid unprecedented levels of Federal Reserve intervention. In addition, the growth is particularly due to the large amount of liquidity injected into the system, while maintaining interest rates close to zero or even negative.
The reliance on an unlimited supply of the Federal Reserve provides the market situation with greater risk
In this sense, the reliance on an unlimited supply of oxygen by the Federal Reserve provides the market situation with greater risk. Especially, if it is considered that at any time these economic policies may change. For this reason, many investors assume that they increase the chances of problems in the financial market.
The recent publication of favorable employment data added to the estimates, suggested to the investors an increase in the costs of indebtedness of the companies and a possible future overheating of the economy.
Additionally, according to the Financial Times, the latest US productivity data has not fulfilled the analysts' expectations, while the country's trade deficit has increased.
Thus, it should be keep in mind that the decline in stock prices in recent days has occurred in the middle of historical highs, so it could be considered a market correction.
This behavior of the financial market can have an impact on investor confidence. In this sense, the current economic scenario suggests that a quick sale of shares could leave them vulnerable in case the market changes unexpectedly.
Also, considering that the price of this stock market is a key indicator, its monitoring would point to where the US economy is heading.
Latin American Post | Gexania Umbria
Translated from " ¿Existe una Burbuja Financiera en Wall Street?"