Hello Trader,
There are several scenarios that could play out this year and into next year for the stock market. We need to be prepared for all of them.
Muddle Along
We see the stock market muddle along just like it has been doing. Congress raises the debt ceiling. No shutdown. The Budget gets pared down a bit but gets passed. So fiscal policy stays expansionary.
The Fed keeps making move to tighten more and end the quantitative easing. The market drops sharply and the Fed reverses quickly.
In this scenario, the stock market muddles through and slowly and sluggishly climbs further into the Spring of 2022.
The Bull Case
Really, the Muddle is the bull case. It would be more bullish if the Fed stopped talking about tapering but I don't think they will. The Congress will likely keep the fiscal gas pedal to the floor.
The stock market would continue higher but at a slightly higher rate than the Muddle.
The Bear Case
Congress doesn't pass the debt ceiling increase falls into chaos. Threats and actions about shutting down the government are front page news. Both sides blame the other. It drags on for months pushing the economy over the fiscal cliff.
At the same time, the Fed keeps tightening slightly which means that the pressure from the Fed is bearish.
The stock market crumbles under the double whammy and drops at least 20%.
Which scenario is more likely? Right now, I think somewhere between Muddle and Bear. We need to watch every little move from the government and the Fed like a hawk.
The problem is that there are background forces that are slowly moving in a bearish direction too. I'll talk about those later. I think most of those forces will hit harder next year.
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I haven't been bearish for 18 months. I wouldn't call myself bearish now. But clouds are gathering so I wanted to get as many people as possible to be prepared. If there is not bear market soon, you haven't wasted your money. There will bear markets in the future and you can use the information then.
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Thanks!
Good bear (?) trading,
Courtney Smith
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