New Administration Faces Market Risks, Will Need More EasingBrenda Whitman
On Wednesday, January 25, the Dow Jones Industrial Average reached a new milestone. It passed 20,000 points for the first time in history. Earlier in the month, the S&P 500 index reached a record high as well. On the surface, this looks like a good thing. The economy is on the path to prosperity again! But in reality, many experts believe there are problems on the horizon which could bode poorly for the markets, and for the American people in general.
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Trends in the Stock Market
According to Sven Henrich, economist for NorthmanTrader.com, this bull market can’t last much longer. Every time the S&P 500 reaches a new high, it soon after drops again, to even itself out. It’s risen about 6% since the election, but Henrich believes it will drop 4% in the near future.
Likewise, many are warning that the Dow highs are the result of a bubble. Overconfidence in the market is driving prices up higher than they should go naturally. It’s great for a time, and everyone makes money, but before long, the bubble will burst. At best, this means a bear market. At worst, this could even mean a full-on crash.
Impact on the New Administration
In the event of a crash or serious economic downturn, Swiss investor Marc Faber believes that President Trump will have no choice but to enact QE4—i.e. a fourth round of quantitative easing, following the financial crisis of 2008.
This is something Donald Trump has addressed before, albeit in more simplistic terms. In May of last year, he said that the government could solve its monetary issues by simply printing more money. This is not quite how the process works, and the act of putting more money into the market can have serious economic repercussions.
Quantitative easing doesn’t involve the actual printing of new bills, but it does put more money into the markets. The way it’s done is, a central bank purchases bonds or other government securities from the market. This provides financial institutions with more money, thus lowering the interest rate. This has been done three times so far in the last 9 years. The first was in November of 2008, and the most recent was in September of 2012.
On the surface, it seems like a good way to get the economy back on track, but unfortunately, it’s not without its drawbacks. It can lead to inflation, as well as depreciation of the overall value of the dollar.
In the face of this new potential financial crisis, and the possibility of QE4 and rising inflation, there’s one silver lining—quite literally. Marc Faber believes that this turmoil will lead to a significant increase in gold, silver, and other precious metals. This is a typical response when the dollar weakens and the stock market falls. It’s quite possible that, when the bear market returns, the gold slump will be over.
So what does this mean for you? It means that now is the time to ensure your own safety net against the coming bear market. Investing in gold as a safe haven is a good way to preserve your nest egg. If your stocks go down, your retirement fund isn’t wiped out, and you still have something to fall back on. With gold currently at a low point, this seems like the perfect opportunity to get a gold IRA and watch it increase in the years to come.