Could a major market correction be on the way?

Major financiers are increasingly talking up the possibility that excitement over the stock market is detached from reality.

As reported by ZeroHedge, David Solomons is of the view that greed is well ahead of fear in terms of how investors are approaching markets.

Speaking at the New Economy Forum in Singapore, Solomons said: “When I step back and think about my 40-year career, there have been periods of time when greed has far outpaced fear -- we are in one of those periods. My experience says those periods aren’t long lived. Something will rebalance it and bring a little bit more perspective.”

Following the massive drawdown in March 2020, which came thanks to the economic devastation caused by Covid-19, a number of indexes have paradoxically seen a resurgence.

The S&P 500, Nasdaq and Dow Jones Industrials all reached record high levels in November, a continuation of a trend seen over the past 12 months.

“Chances are interest rates will move up, and if interest rates move up that in of itself will take some of the exuberance out of certain markets,” Solomon added.

Furthermore, with high levels of inflation, supply chain bottlenecks, labour shortages and new outbreaks of Covid-19, things could get worse again.

Amid this macro-economic outlook, valuations are at historic levels.

The S&P 500’s Shiller price-to-earnings ratio has eclipsed 40 for only the second time ever.

The Shiller looks at inflation-adjusted earnings over the previous ten years. While it is not necessarily an indicator that a crash will take place, it does serve as a warning signal.

The last time the S&P 500’s Shiller price-to-earnings ratio went above 30, the index went down by 20%.

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