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March 15, 2015

Will S&P 500 Downtrend Continue?

By Nikolai Kuzentsov

Throughout the course of the past year, we've seen pretty strong movement in all 3 Unites States blue chip indices. However, it seems as though things have started to take a turn for the worst over the last week or so, and the S&P is definitely feeling the pain. So, today we'll take a look at what the cause of the upward moment we saw over the past year was, how the S&P 500 is moving currently, and how long we can expect the current downtrend to last.

What Caused The Stock Market To Perform So Strongly Over The Past Year?

The year 2014 was an incredibly strong year for economic and market growth. With quantitative easing still in place through the beginning of the year, and low interest rates expected from the Federal Reserve far from being increased, the market took positive economic news and ran with it. Simply put, the economic stimulus plans put in place by the Federal Reserve worked; easy money flowed and investors, businesses, and consumers all benefited.

What Caused the S&P 500 to Start Falling?

The S&P 500, Dow Jones Industrial Average, and NASDAQ all started their decent around the same time. Recently, February's non-farm payroll data became available. While the data was incredibly positive, sometimes in the stock market, seemingly positive news can be negative. The data showed that the United States added far more jobs in February than projected; meaning that the economy is growing at a faster rate than we expected.

S&P500 V’S NASDAQ – 1 Month

Comparision Chart From anyoption

So, How Is That Bad News For The Market?

One of the most crucial factors that have been pushing the S&P 500 and other indices in the upward direction is the fact that the Federal Reserve is currently offering incredibly low interest rates as a part of the economic stimulus package put in place years ago. However, when that plan was put in place, everyone knew that it had to end one day; ultimately causing an increase in interest rates. The overwhelmingly positive payroll data that was recently released showed that we are getting close than we expected to an interest rate hike. When this happens, easy money is essentially a thing of the past and markets will adjust. So, the decline we're seeing is the product of a slight sell off from investors looking to protect their assets before the rate is increased.

How Long Can We Expect the S&P 500 Downtrend To Last

Unfortunately, I'm not too sure that this is going to be a very short term trend. The reality is that economic stimulus can have damaging effects as well. When the market generates money like an ATM with very little risk, excessive risk taking becomes a more common occurrence. As a result, we tend to see a new issue...stock over-valuation. While this is a major debate among finance professionals, I'm on the side of the fence that says we are hitting this crucial point; creating a dangerous bubble in the market. With that said, if the downtrend doesn't last very long this time, we can expect to see it come back for a second round relatively soon.

Final Thoughts

While I hate to be the guy that claims the sky is falling, in this particular case, I'm very concerned with the stability of the S&P 500 and the United States stock market as a whole. As economic conditions continue to improve at a faster than expected rate, the Federal Reserve becomes more and more likely to increase interest rates. However, with struggling foreign trade and inflated stock values, I'm not sure that the United States markets are ready for such a big move.

About the Author: Nikolai Kuzentsov (Article Archive Here) is an award-winning financial analyst and professional trader with extensive experience in stock market analysis, investment research in FX, commodities, equities and bonds.  An expert in technical and statistical analysis. Kikolai is also an avid chess player and a black belt Brazilian Jiu Jitsu Practitioner. Nicolai writes at Nikolaiknows.com.   

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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