Analysts from Bank of America Merrill Lynch recently released a note of warning to their clients indicating that the U.S. market is about to enter a bear market. The forecast extends to both stocks and bonds, and claims that peaks have been hit across different asset classes. With assets across the board at high points, it stands to reason that many are overextended, and once this is detected by the general public, a major pullback will occur. This will lead to large drops in stock prices, pulling indices down across every sector in the U.S. marketplace. Investors especially need to be cautious here, but the warning also extends to traders—even binary options traders.
Warnings like this happen often, but not usually from major players in the economy like Bank of America. These types of actions have far more weight than if a minor investing firm were to make the same claim, and this type of action has the potential to trigger potential selloffs based upon a purely psychological reaction. That psychological reaction does not need to be founded as prices can easily move without a strong reason. Those caught unaware by the change in sentiment can easily lose a lot of money, and traders need to pay attention to not just the news, but the sentiment that it generates for this reason.
Undoubtedly, the Federal Reserve’s policies have also been taken into account when this opinion was formed. It’s hard to know precisely what the Fed will do, but in many ways their actions have been very predictable. The Fed has flirted with raising rates again, but they have not because of their large focus on inflation. While companies are doing better than ever before across the board, boosting the major indices to all-time highs on an almost regular basis, inflation is about a full percentage point behind where it typically is. This has placed a seemingly unsustainable rate of growth in the business sector, but has hurt the country’s economic growth as a whole, especially in light of the dollar’s stagnation against the hard pressed euro and pound sterling. This is not a necessary cause for stock market reversals, but it can be a major factor, especially if nothing significant changes in the next several months.
The actual letter cited policy changes as the main cause for why these issues are likely to occur. Rather than focusing on market growth, it was argued that policies targeting deflation assets are now more beneficial to inflation assets. The policies that have helped liquidity and move globalization forward are shifting focus. There might not be a conscious effort to do this, but in effect this is what is occurring, it’s argued. In light of this, analysts from Bank of America believe that the ease with which these things have progressed with is in flux, and that trade will hurt as a result of this. The long term consequence of this is that companies will profoundly suffer.
Whether or not these things are true remains to be seen. Sometimes just the belief that they will occur is enough to force them to occur. This is rare, though. Rather, what usually happens is that there is a short term bounce—either up or down depending on the news or event that occurs—and then the long term fundamentals override whatever short term fluctuation occurs. For traders of all sorts—be they day traders, binary options traders, or something else—having a grasp on the technical, the fundamental, and the sentimental data that occurs will help guide trading decisions and guide you to a profit regardless of whether we are in a bear or a bull market.