April 17, 2024

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Stock markets break records: the risk of collapse is real

Stock markets break records: the risk of collapse is real

Scholarship3 Mar 24 at 2:25 pmauthor: Lotte van Coevorden

Global stock markets continue to break records, leaving investors rejoicing. However, the question that arises is whether this increase is a harbinger of a possible stock market collapse, similar to the “dot-com crash” at the beginning of this century. “Given the valuations, the risk of collapse is reasonable,” says Marcel de Boer, a journalist at the newspaper FD.

Stock markets break records: the risk of collapse is real

De Boer points to the self-reinforcing effect whereby investors intervene when the market appears to be “running like clockwork.” According to him, this mainly happens after the strong performance of major technology companies or good prospects in the field of artificial intelligence. “There is a lot of promise in artificial intelligence, and it reminds us of the dot-com craze of 1999.”

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Since the end of October, a number of indicators have risen by between 15 and 25 percent. “I think it's not too bad, but looking at valuations, the risk of collapse is real,” says de Boer. the 'Periodically adjusted price-to-earnings ratio(CAPE ratio) is a valuation measure applied to the US stock index S&P 500. “If you look at the S&P 500, you see that it is currently more expensive than it was on the eve of the stock market crash in 1929.”

It can be explained logically

However, it can also be interpreted that the market is rising. Companies are showing strong growth and a study by asset manager Schroders shows that setting monthly records on the S&P 500 stock index is not unusual. “Over the past 98 years, this has happened in 30 percent of all months since 1926, so it's not as unusual as it sounds,” de Boer says.

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Enthusiasm is high and investors do not seem to be exiting due to the potential risks. Schroders research shows that this could also be a costly decision. “The market still has room to rise, which means the returns that still lie ahead will be missed,” says de Boer.

Global uncertainties

But there are also voices pointing to geopolitical and economic uncertainties, such as conflicts in Ukraine and the Middle East, the blockade of the Red Sea, rising oil and gas prices, and slow developments in the housing market. These factors were a cause of pessimism in stock markets in previous years. It was expected that companies could only survive at very low interest rates. “They will all collapse once interest rates rise. That has not happened, which suggests things are not so bad,” de Boer said.

Stock markets around the world are breaking one record after another. Since the end of October, a number of indicators have risen by between 15 and 25%. Marcel de Boer, a journalist at the Ministry of Finance, points to the self-reinforcing effect by which investors intervene when the market appears to be “running like clockwork.” (ANP/Kim Van Dam)