Reward 1000 Tiger-coinsThe White House warns of a potential stock market crash exceeding 45% in the event of a US Debt default.
As the debt crisis continue to brew, the stock market now stays at a high level since Aug. of 2022. There are several dangerous signs of a possible pullback of broader market.
Risk 1: Debt default may cause a 45% market crash?
Analysts warn of more volitility in stock market.
Back in 2011, the two parties in the United States reached a compromise at the last minute to avoid a debt default, leading to the first-ever downgrade of the U.S. Treasuries credit rating by Standard & Poor's.
Some strategists warn that the stock market may experience volatility before June 1, the so-called “X-day.”
Currently, as the deadline approaches, stock market investors do not appear to be panicked, partly because most people believe that Congress will eventually reach an agreement.
Risk 2: Broader market at an unreasonable high level; tech stocks are overbought.
The $S&P 500(.SPX)$ has risen over 9% this year and is currently near its highest level since August 2022. The current valuation of the stock market is relatively high compared to historical levels.
The SPX is consolidating in a range of 4000-4200 points and hard to break the range.
The surge of big tech - $Microsoft(MSFT)$ , $Alphabet(GOOG)$ , $Amazon.com(AMZN)$ , $NVIDIA Corp(NVDA)$ and $Meta Platforms, Inc.(META)$ have propelled their relative strength index above 70 in recent days. Such an elevated RSI level is generally considered as overbought territory.
The strong upward momentum in big tech may be coming to an end.
On the other hand, second-tier growth stocks like $Palantir Technologies Inc.(PLTR)$ have started to rally, with gains exceeding normal levels.
Risk 3: VIX at a historic low level.
$Cboe Volatility Index(VIX)$ , the volitility index, generally moves back towards its long-term average(13-25) or mean level over time.
VIX rose 2.32% to 18.96 yesterday, indicating growing investor unease.
However, it is still at its lowest level since the end of 2021 despite of the imminent debt default issue. For reference, VIX rose to 30 during bank crisis.
Risk 4: The Sword of Damocles - FOMC minutes tonight
According to CME Group's FedWatch,
there is a 68% chance that the Federal Reserve won’t increase rate at the upcoming meeting.
There is an 85% chance of one or more quarter of a percentage point rate cuts by December.
However, Fed officials have different statements.
Dallas Fed President Lorie Logan and Federal Reserve Bank of Cleveland President Loretta Mester suggest that
the economic data has not yet met the requirements to justify maintaining interest rates at their current levels.
Do you think the broader market will pull back soon?
How do you view the current low level of VIX?
How will Debt Crisis end?
Leave your comments and win tiger coins!
Comments
I believe the same thing might happen as what happen in 2011, it is a last minute decision to raise the debt ceiling, but what is the cool down period market can afford?
A healthy pullback is good for longer term investors as it may present an opportunity to load up more or DCA. I am definitely going to be on a lookout for potential bargains [Grin]