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Tuesday, 14 October 2014

Markets to Bounce or Fall!

Let's recall how we got here:

There are many conflicting indications as to what will happen next. Recalling how we got here may have some benefit.

The economic collapse of 2007/ 2008 brought markets around the world to their knees. The vertical pink line marks the point in time that Quantitive Easing and Zero Interest Rate Policy were introduced.

These policies intended to put cash back into the market place and stimulate the economy. Whatever about that, a side-effect was that people took their cash out of bank accounts and bonds and put them into equities. The stock markets of the world responded positively. Share prices shot up without a sufficient increase of production to substantiate the rise.

Economies are now growing, and eventually production will catch up with prices. For the moment, however, what the market sees is Quantitive Easing ending and Interest Rates rising. Inevitably, equities must fall in proportion.

Yes, there is scope at the present moment for a bounce-back to answer the great slump of the last week, but this recovery, if it occurs, will be short-lived. I see the S&P returning to its natural upslope in due course after a significant correction. There is scope for the correction to happen suddenly or to be spread out in time.

Click on the image to enlarge.

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