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“Risky Business: When Irrational Exuberance 2.0 Reverses the Stock and Bond Markets

The stock and bond markets have been on a tear for the last 10 years, reaching unprecedented highs in 2020. This has led analysts and investors to dub the situation as “Irrational Exuberance 2.0”. Although the rally has been impressive, many on Wall Street are starting to believe that these markets are due for a reversal soon. As the markets rose over the last decade, investors have poured money into equities and bonds in the hopes that their holdings will continue to gain value. Many have been rewarded with healthy returns, but there are growing concerns regarding the sustainability of these gains. One of the biggest problems with the current markets is that the prices of stocks and bonds have become inflated due to investors’ overconfidence in the continued growth of the markets. It is possible that the markets could continue to rise for some time, but it is inevitable that the prices will eventually cool off and some investors will be left with a loss. Furthermore, the Federal Reserve has been working hard to keep the effects of the pandemic at bay by providing support to the markets. Although this short-term support may be helpful, the long-term effects of the Fed’s intervention in this way are unknown, and it is possible that the markets could face some kind of significant drop due to reliance on the Fed’s manipulations. Overall, the markets are overdue for a significant correction. The current portfolio of stocks and bonds is overextended compared to its long-term averages, suggesting that investors should be wary. Traders and investors should think carefully before jumping into the markets, as the winds of change are just beginning to blow.