Is A Stock Market Drop On The Horizon

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When it comes to stock market sentiment, there are a lot of factors that come into play. As of May 2023, the biggest is the debt ceiling of the US. Recent developments have led financial analysts to predict a potential drop in stock market prices in the near future, so let’s take a look at the factors that are pointing to potential issues in the coming months.

Current US Economic Factors Impacting Stock Markets

With the Federal Reserve tightening, fiscal giveaways as a result of Covid 19 and the cap on student loan payments across America initially driving GDP and inflation, excessive government spending is now beginning to show strain, and this could cause a recession by the end of 2023.

Some of the biggest contributors to a stronger economy in the past few years is the fact that pandemic era fiscal giveaways and low interest rates led many U.S households to generate around $2.3 trillion in savings by mid 2021, and this was largely in relation to mortgage refinancing protocols cutting average monthly expenditures by around $220 for roughly nine million families and student loan relief causing savings of around $195 billion.

The issue that has arisen is that these financial support systems are soon coming to an end – and going from such high consumer savings to increased spending in a short amount of time will potentially leave stock markets and the US economy vulnerable to recession.

To combat this, President Biden and house speaker Kevin McCarthy reached a debt ceiling deal agreement just a few days ago, detailing mild spending curves. One aspect that has got investors, analysts and market experts on edge is the fact that the Biden administration is planning to end the current student loan payment freeze – and this has largely assisted with the spending increases and strong economy in recent years.

The knock-on effect of this is that spending is likely to slow down even further – and this is coming at a time when spending is at an all-time low. This could mean that rate hikes are going to be necessary in the next few months, to offset potential fiscal issues from arising.

Important Information About The Debt Ceiling Deal

One of the major factors contributing to stock market concern is that discretionary spending hasn’t been cut down enough, and this is because the factors outlined by Biden and McCarthy were not in line with the suggestions made by House Republicans. The wider sentiment was that discretionary spending should aim to meet the numbers seen in 2022, but they were set at 2023 levels instead.

Military and veteran’s health spending was not included in the deal, the work requirements for adults without children have been tightened in regards to receiving food aid and $10 billion has been removed from the $80 billion that was awarded in IRS funding which aimed to improve tax enforcement protocols. The discretionary budget allowance increase is going to be limited to one percent for Fiscal 2025, which is below the rate of inflation.

These factors alone would not necessarily have a distinct impact on the stock market and the wider US economy; the fact that Biden’s 4 billion dollar student loan forgiveness program is due to come before the Supreme Court next month however, could have. Experts are concerned that ruling against this program will affect borrowers by as early as September and a recession and negative sentiment for the stock markets will prevail.

Can Cryptocurrencies Help Improve Stock Market Performance?

One thing keeping industry experts optimistic is the fact that cryptocurrency and stock markets have a favorable connection – as long as volatility remains within the crypto space, stock markets are likely to perform well. While the exact impact isn’t fully understood, there are correlations between crypto token prices plummeting and stocks seeing less favorable market sentiment and vice versa, so there is certainly data to be considered.

For example, supply and demand can dictate value increases and decreases in assets and both corporate and consumer behaviors will drive change in the prices of goods and services – and these factors will hold power over the costs of shares.

In this context, right now the future supply of Bitcoin is dwindling yet demand is growing, so prices are hitting an all-time high. As other cryptocurrencies are likely to not only grow in popularity due to Bitcoin’s changing status, but also to see a similar surge in demand, buying and selling will increase, improving the crypto stock market and therefore boosting the traditional stock market at the same time.

The good news is that the more cryptocurrencies are adopted across the world, the greater the impact is likely to be – and even considering memecoins, including Shiba Inu and Dogecoin, could help analysts to make better predictions for the health of the wider stock market in the future.

What Can Be Done To Combat The Potential Recession?

Right now, the Federal Reserve is proposing a set of moderate interest rate increases in the coming months, in the hopes of slowing inflation without having a wider impact on GDP. This has already begun, as the Federal Funds rate increased by 0.25% points in February, to help to reach a target range of 4.5% -4.75%.

If things don’t improve, higher interest rates may become increasingly more necessary – but this will only have a more significant impact on stock market performance as the year wears on.