By Admiral Markets
July 2019. This date has been marked in the calendars of traders and investors around the globe. Why? Because it will mark exactly 10 years since end of the Global Financial Crisis in 2009.
And, at this point, the global economy will also surpass the 1991 to 2001 economic boom as being the longest economic expansion on record.
The 90s economic boom was fuelled by the internet. This economic recovery has been fuelled by historically low interest rates and cheap credit – a situation some investors and economists believe cannot last.
Having experienced the highest volatility in the stock market since the financial recession, it’s not surprising that investors are worried.
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This is just one reason why some of the world’s biggest hedge fund managers and top leading economists are predicting a crash next year. Another reason is rising interest rates and the US Federal Reserve, a.k.a the Fed.
Why Is the Market Facing a Potential Crash?
Since 2015, the Fed has increased interest rates eight times. After all, the US economy is firing on all cylinders. However, as the US nears full employment, there is increased danger of rising inflation and higher consumer prices.
The Fed’s job is to make sure this doesn’t happen. To stop inflation going too high, central banks increase interest rates, which increases the cost of credit while making saving money more attractive. This then strikes a balance between people spending and saving.
However, there are dangers to this approach. Lower consumer spending has a negative impact on the revenue of consumer-facing businesses. When this revenue goes down, spending then tightens across both the consumer and business landscapes. At the same time, as rates spike higher, it makes it harder for financially weak companies to meet their debt obligations.
It’s a vicious cycle that can lead to economic shrinkage, declining stock prices and, in a worst-case scenario, a stock market crash.
And, if we review the relationship between recessions and historic interest rate cycles, it’s easy to see why alarm bells are ringing.
How Much Could the Market Fall?
Investors and economists are warning of a crash of up to 70% within the next year.
Scott Minerd of Guggenheim partners and hedge fund manager Paul Tudor Jones believe this aggressive policy of interest rate hikes could trigger the next stock market crash, with the latter forecasting a 40% drop.
Meanwhile, Economist Ted Bauman believes the market could drop by 70%. And Bauman successfully predicted the last two collapses in 1999 and 2007.
Finally, the CIA’s Financial Threat and Asymmetric Warfare Advisor Jim Rickards has claimed that a 70% drop is the best case scenario.
How Traders Can Take Advantage
With great volatility can come great rewards, and the right financial instruments give traders the opportunity to profit in both rising and falling markets.
By using share CFDs and index CFDs, traders can turn any potential market crash into a profit, or hedge their existing investments until the market turns, with short trades. Start honing your skills today with a free demo account.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
Article by Admiral Markets
Admiral Markets is a leading online provider, offering trading with Forex and CFDs on stocks, indices, precious metals and energy.