The world is still gripped by fear of COVID. The US economy has yet to fully recover from COVID lockdowns, with millions of Americans still out of work and relying on government assistance to get by. And rising inflation is beginning to impact the pocketbooks of working Americans, driving up their cost of living. In short, the future of the US economy doesn’t look too good.
Knowing that, you would think that stock markets would reflect that unease about the future. You would assume that investors would price in that risk. You would imagine that investors would get nervous about continued economic growth, would understand that corporate income could very well continue to remain under trend, and would act accordingly. But while many investors have gotten wary of stock markets and have turned to alternative investments like gold and silver, many more have remained in stock markets.
What’s more, not only have they remained in stock markets, but they have doubled down. The Dow Jones Industrial Average is up over 12% already this year, despite the economy still not having fully recovered from COVID lockdowns. And why is that? Well, there’s one sobering statistic that tells the story.
Stock Markets Flooded With Cash
Millions of American households have become dependent on government handouts over the past year to get by. Between stimulus payments and additional unemployment insurance, trillions of dollars have been spent propping up American households. Where has that money gone?
Polls of Americans’ spending habits indicated that significant portions of that money was going to buy stocks. But while saying the average Americans was going to spend 37% or 55% or whatever percentage of a stimulus check sounded high, what did that mean in raw numbers?
Here it is: more money has been poured into stock markets in the last 5 months than in the previous 12 years combined. Yes, that’s right, from November to today, more money has been put into stocks than from 2009 to November. In monetary terms, $576 billion has flowed into equity funds since November, versus $452 billion in the previous 12 years.
Just think about that and what it means. 27% more money has flowed into stock markets in the past 5 months than in the previous 12 years. Is it any wonder that stock markets have seen such amazing growth? When so many people are buying stocks, that increased demand will naturally lead to higher prices. But how long will this cycle continue?
The Greater Fool Theory
In investing, the greater fool theory is a way of describing the behavior of investors who buy overvalued securities. Whether or not they know that the stock they’re buying is overvalued and overpriced, they think that they’ll be able to sell the stock at a higher price to someone else in the future. That person is the “greater fool.”
The theory works well, until it doesn’t. If you can’t find any more fools to buy the overvalued stock you purchased, you end up holding the bag and getting stuck with the losses when stock markets collapse. And when will they collapse?
That’s anyone’s guess. We’ve been waiting for a collapse for a long time now. We’ve seen numerous corrections, including last year’s 35% drop. But a 2008-style or 1970s stagflation-style collapse hasn’t hit us yet. Could it happen soon?
If stimulus payments being funneled into stock market purchases have been responsible for so much money flowing into stock markets and thus for higher stock prices, it stands to reason that once the monetary spigot is turned off, stock prices will correct and return to more normal valuations. While there are calls from Washington for a fourth round of stimulus, inflation fears are starting to rise, not just among ordinary investors but also among policymakers and legislators.
The fear that a fourth round of stimulus payments could boost inflation could be enough to ensure that there won’t be another several trillion dollars spent on stimulus. And that could short circuit the stock market rally that is currently taking place.
In the meantime, it can be hard to look at stock markets rising and think that all of this could come crashing down in an instant. If you’re still invested in stocks, you may be tempted to think that nothing’s wrong, and that markets will continue to rise forever. If you’ve already assumed a defensive investing posture and reduced your exposure to stocks, you may be second-guessing yourself, wondering if it was really such a good idea to miss out on potential gains. You may even be tempted to jump back into stocks to get more gains. But is that wise?
What Could the Future Look Like?
While you might think it would be nice to get more free money from the government, the reality is that with a skyrocketing national debt, rising inflation, and an economy that still hasn’t recovered, the ability to engage in more stimulus just isn’t there. While some Democrats may be pushing for a fourth round of stimulus payments, at the end of the day the political will just isn’t there.
The last thing Joe Biden and Democrats want is to start off his term with skyrocketing inflation and a weak economy. The comparisons with Jimmy Carter are already starting to manifest themselves, and the last thing Biden wants is to become the next Jimmy Carter.
Once stimulus comes to an end, the amount of money pouring into stock markets is bound to slow. The likely outcome in that scenario is for stock prices to start dropping. From that point it’s a psychological game to see what happens next.
With so many new investors having hopped into markets at high price valuations, it’s all but inevitable that many will get worried and try to cash out before suffering losses. If enough of them do that, it could send more investors racing for the exits, sparking an all-out panic.
Today’s market looks more and more like the top of the dotcom bubble that burst in 2000. And since most investors under the age of 50 don’t remember how that bubble was created, how it burst, or how bad its effects were, the likelihood of a repeat are incredibly high.
The overpriced stock market poses a risk to the portfolios of every investor. And if you haven’t protected your investments already, you may not have much time left. Once markets start to correct, if you haven’t put your protection strategy in place, it might be too late.
Precious metals such as gold and silver have been among the most trusted assets investors have used to protect their savings and investments over the centuries. Their ability to protect wealth against inflation, maintain their value through weak economies, and defend against turmoil is well known to many investors.
Gold and silver have helped investors maintain and grow their wealth through the stagflation of the 1970s, through the bursting of the dotcom bubble, and through the collapse of the housing bubble. And they could play a role in protecting your wealth during the next crisis too.
With a gold IRA, you can even roll over or transfer existing retirement savings into an investment in precious metals. Your gold IRA would then enjoy the same tax advantages as any other tax-advantaged IRA retirement account.
Don’t allow the hard work you’ve done to save and invest for retirement go to waste. Contact the experts at Goldco and learn how to protect your wealth today with gold and silver.