To say the Omicron variant shakes up the market would be an understatement. But add that stocks are more expensive than they ever were – and the real correction now won’t surprise anyone.
It is down nearly 4% from an all-time high in late November, before scientists in South Africa reported the new Covid-19 strain. On Friday, the market had him The worst day of the year. Tuesday was even more horrific – producers of vaccines and treatments expected Treatments may not be effective against Omicron as other variables. The pain continued Wednesday when The United States confirmed its first case of Omicron.
But that real correction – a 10% drop – was out of reach, Even during all these months of the pandemic. This in itself is a bit surprising, because corrections are often a normal part of a larger bull market.
However, one indicator predicts a correction – like a dark cloud that usually brings rain. Total US stock market capitalization is about 215% of US GDP – an all-time high, according to global financial data.
This large number is not good. It’s bad, and it’s often a sign that a correction is around the corner.
In 1929, the market capitalization of GDP reached an all-time high of nearly 100%, before the famous stock market crash late that year. In 2000, another rally started at around 150%, before the bear market started – a drop of at least 20%. In 2008, it was its highest level in several years, just prior to the financial crisis.
Result: possibly correction; Then again, maybe not. Everything is in the hands of the investors.
Stock valuations are certainly not the best timing tool for investors deciding whether to buy or sell more. Ratings can stay high for a long time.
For most of the pandemic era, in fact, the market was valued at an all-time high relative to GDP. But the high valuations do indeed suggest that when – and if – the economic outlook actually deteriorates, stocks could plummet.
“There is certainly the potential for additional market dips and increased volatility in the coming weeks as a result of this swing, especially given all the uncertainty surrounding it,” wrote Christina Huber, chief global market strategist at Invesco. “There is room for a decent correction.”
What the market needs now is a little hope – that vaccines will be effective against the new alternative. Otherwise, prepare for correction.
Write to Jacob Sonenshine at firstname.lastname@example.org