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WARNING: Risk Of Market Crash High

Feb. 26, 2021 8:56 AM ETVanguard S&P 500 ETF (VOO), SPYQQQ
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  • Sudden spikes in year-over-year data suggest caution is warranted.

Note: This post does not constitute financial/investment advice. Advice should be sought from fiduciary professionals who can take individual investor charactersitics and circumstances into account. Warnings issued about changes in stock market prices are based on historical data, which may not necessarily reflect future price movements.

This is the first ever warning about a possible large downward move in the US stock market. based on the principal metric underlying the Exact Macro Market Monitor signal service.

Historically, when this metric rises to 2 standard deviations above the simple moving average in year-over-year data, a sudden, large price movement back down near the simple moving average occurs. This could mean that a fall in the S&P 500 of 13%, or even a bit more, is likely to occur over the coming several weeks. This would represent only a 0.38% fall in the expected future growth path of NGDP, but has such a large effect due to the current relatively low S&P 500 discount rate of 2.56%.

The spike in the above-mentioned metric is not quite at 2 standard deviations, but is getting very close, so caution on long stock market positions is warranted. The probability of such a crash is over 94%, based purely on historical data. Expect higher volatility to continue, without sufficient positive economic news, or forward guidance or other monetary easing from the Federal Reserve.

There is a bit more uncertainty warranted here than in past such episodes, however, as this is the first episode to occur under the Fed’s new average inflation targeting (AIT) regime. Previously, the Fed was targeting inflation at 2% and often undershooting its target. If AIT does prove more accommodating, it could ease the current danger, at least attenuating the potential rapid loss in value of the S&P 500 index, and other US stock indexes.

The Fed is being tested. It will be interesting to see if it is more proactive than in the past.

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