Weekend Gold Forecast - Sunday, Jan. 17

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Much of the stimulus money sent out to Americans has made its way into the stock market. This is creating the divergence we see between “the markets” and the “real economy.” The bubble in stocks could end badly, for some investors.

In April 2020, the personal savings rate for Americans spiked to a record 33.7%. It has come down since but remains high at 12.9% as measured in November. It has probably ticked up since the last round of stimulus and could exceed 20% in Q1 if Biden sends out an additional $1400.

A lot of that money has been flowing into disruptive sectors like electric vehicle stocks, battery technology, and cryptocurrencies. Investors “buy the story,” and valuations metrics like earnings take a back seat. Novice investors rush headlong into the rapidly rising markets…not knowing what awaits them. 

We saw a similar disruptive theme in the late 1990s during the dot.com bubble. At that time, any internet or e-commerce stock exploded higher in speculation – valuations and earnings meant nothing. One of the leaders back then was Yahoo. In the chart below, you’ll see Yahoo’s market cap explode to $116-billion from 1996 to 1999 before crashing back to $8-billion in 2001.

The market capitalization of Tesla has exploded similarly. In May 2019, Tesla’s market cap was $32-billion. Earlier this month, it hit $824-billion – an increase of 2400% in just 20-months.

How long will the bubble in stocks last? The answer depends on two factors: stimulus and the next market shock.

STIMULUS

If Biden pushes through an additional $1400 to the same income brackets as before, then speculative markets could continue to surge into the first half of 2021. However, I see several dark clouds on the horizon that could easily lead to a market shock (see below).

MARKET SHOCK

The coronavirus remains a serious threat globally. We are actually beginning to see an uptick in China. There are also reports that dozens of the elderly have died in Norway after receiving the first Pfizer shot. Not to mention escalating political tensions in the US and China. A significant news event or a series of smaller ones could lead to a quick and sharp selloff. As novice retail traders (Robinhooders) see profits dwindle, we could see a stampede to the exits.

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