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5 Divident Stocks T0 Own Forever
This Is One of the Main Threats from Rising Stock Market Valuations Lombardi Letter 2020-11-17 16:33:51 current stock market rally U.S. stock market rally u.s. jobs report debt rate hike stock market crash coming U.S. economy stock market valuation The U.S. stock market rally has been fueled by low interest rates. The next federal reserve interest rate hike could cause the stock market rally to end. Stock Market Crash https://www.lombardiletter.com/wp-content/uploads/2017/09/Stock-market-Valuation-150x150.jpg

This Is One of the Main Threats from Rising Stock Market Valuations

Stock Market Crash - By |
stock market valuation

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Stock Valuations Are Too High and Vulnerable to U.S. Debt

The Federal Reserve has been warning investors that stock valuations are too high. The Fed was saying this in early April. In the meantime, they rose again. It’s always good not to cry wolf, but sooner or later, the wolf comes. It’s getting closer and it could spell the end of the current stock market rally.

The U.S. stock market rally has been fueled by low-interest rates. The Fed cannot hold back much longer. It keeps finding new excuses not to make the delicate decision. The latest excuse was the lackluster U.S. jobs report. Only 159,000 jobs were added to the economy in the past quarter instead of the expected 180,000 or so. Well, that’s good enough to procrastinate on the inevitable rate hike.

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5 Divident Stocks T0 Own Forever

Also Read: Warren Buffett Indicator Predicts Stock Market Crash in 2017

The markets naturally reacted like a student who has just secured a penalty-free extension on his/her essay deadline. They partied, and the Dow touched the magic figure of 22,000. Yet, just as the student will be panicking the night before the essay is due, the stock market crash is coming. The rate hike cannot be postponed much longer.

The economy may have bitten the interest rate bullet in 2017, but there’s no avoiding a hike in 2018. Janet Yellen, the rest of the Federal Reserve, and economists, in general, fear the rate hike because it will impact something Americans of all stripes—and their government—have accumulated voraciously over the past few years: Debt.

Consider that the United States may not meet certain financial obligations, including a forthcoming major payment to the Veterans Fund ($81.0 billion in 2016) scheduled for October 2. (Source: “2017 Debt Limit Analysis,” Bipartisan Policy Center, August 24, 2017.)

Moody’s Corporation (NYSE:MCO) has already warned the U.S. that if it cannot start lowering its debt, it will lose its rating. Why is that a big deal? A lower rating means the U.S. will have to pay more to borrow. (Source: “Moody’s: If the US defaults, it won’t regain its top-notch debt rating,” CNBC, September 5, 2017.)

But, it’s not just the government that should worry about debt.

Debt is spreading like a cancer throughout the U.S. economy. American companies have been able to survive, if not thrive, thanks to relatively low debt levels facilitated by very low interest rates. But, these are the same low interest rates that have compromised the stability of the financial system. Given the Fed’s concerns about raising rates, it has compromised the stability of the stock market itself.

Then there’s the matter of the massive U.S. private debt. It has been rising steadily with consumer loans. More families have been relying on credit cards, not to mention mounting auto loans and student debt.

The Fed will hold its next monetary policy meeting on September 19 and 20, and the markets do not expect a further increase in key rates before the end of the year, or even before 2018. But when it does, the risk of a financial collapse will rise exponentially.

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