Could the Market Drop 40%?

I recently came across an interesting market analysis that explains why we might be heading for a significant market correction. I follow technical analysis but I still love to keep up to date with the fundamental side of things

Here's a simple breakdown of those insights:

Our Economy is Running on Borrowed Money

Think of it this way: If you keep using credit cards to maintain your lifestyle, eventually the debt catches up with you.

The analysis points out that:

• We haven't had a real economic downturn in almost 17 years

• The government is borrowing heavily to keep the economy growing

• About 4% of our economic growth is actually just borrowed money

The numbers tell a concerning story:

• The government is spending nearly twice as much on interest payments as it did in 2019

• These interest payments now eat up 14% of all government spending

• The yearly deficit has doubled in just six years

Stock Prices Are Too High Compared to Earnings

Wall Street expects company earnings to grow by 50% in the next two years, which is extremely optimistic. But what if we have an economic slowdown instead?

If company earnings drop and investors become more cautious about what they'll pay for those earnings, the market could fall dramatically - potentially by 40-50%.

Even big investment banks like Goldman Sachs are only expecting about 3% annual returns from stocks going forward - much lower than historical averages.

Interest Rates May Stay Higher Than People Expect

The government needs to borrow huge amounts of money to:

1. Pay off old loans coming due

2. Cover the interest on existing debt

3. Fund new spending

All this borrowing creates pressure for interest rates to stay high. Many people expected rates to come back down to 2-3%, but that's looking less likely as government borrowing needs continue to grow.

What Smart Investors Do in Times Like These

The average investor earns much less than the market average (1.9% versus 5.6% per year) because of emotional decision-making. Value investing offers a more disciplined approach:

• Look for companies priced below their true worth

• Focus on businesses with strong earnings and dividends

• Be patient and keep some cash ready for better opportunities

• Don't follow the crowd into overpriced investments

Even Warren Buffett, one of the world's greatest investors, is currently holding record amounts of cash, waiting for better buying opportunities.

The Big Picture

Market cycles are normal. Periods of strong growth (like the 1960s, 1980s-90s, and recent years) are typically followed by flat or negative periods. The analysis suggests we're due for one of those down cycles.

The best investors don't chase hot stocks at any price. Instead, they buy good companies at reasonable prices and keep some money ready to invest when others are panicking and prices are low.

The Power of Technical Analysis in Uncertain Times

In the end, nobody can actually predict what may happen next, which is why we use technical analysis to watch the price action, as the price tells all.

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Regards,
Valentine

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