Is the US stock market too big to fail?

Is the US stock market too big to fail? ©

Here's the information most investors are missing... 🤫

One of Bloomberg's most senior analysts recently raised a scenario that sounds far-fetched at first glance, but when looking at the direction the world is heading,

it doesn't seem so implausible:

It's possible that in the next major crisis, the Federal Reserve will also buy stock ETFs, just as it bought bonds in 2020. 🛒

If this happens, it's a game-changer. 🃏

The US stock market is no longer just a market; it has become a national pension system. In the past, sharp market declines primarily hurt investors who lost capital in steep drops. ⛈

Today, they directly impact pensions, household financial security, and the stability of the entire economy. 👛

Today, about 60% of Americans hold stocks, a significantly higher percentage than most countries worldwide. 📊

If the new savings plans ("Trump accounts") come into effect, they will bring tens of millions more investors into the market, and the percentage of stock holders could approach 70%. 📈

This means the majority of the voting public will be directly dependent on stock market performance. 📊

This is already a game of politics, not just economics. ☢️

The precedent already exists; in every major crisis, the Fed has expanded its toolkit. 🧰

2008 - The Fed buys mortgage-backed bonds. 🛒 2020 - The Fed buys corporate bonds and bond ETFs. 🛒

The next crisis? Possibly the purchase of stock ETFs. 🛒

This might sound unusual, but the measures of 2008 and 2020 were also once considered impossible. 🫴

Furthermore, Japan and China have already demonstrated that buying stock ETFs can become a policy tool during crises. 🫴

Will political pressure only grow?

When tens of millions of American voters see their retirement savings in the stock market cut by 40%-50%, the pressure on the administration becomes immense. 🔥

Even if the official goal is "maintaining financial stability," in practice, it's about supporting the stock market. 💵

According to the report, three-quarters of survey respondents believe the Fed will intervene and save the markets in the next crisis. 👌

As this belief strengthens, every dip becomes a buying opportunity for investors. 🛒

Does this mean the market will continue to rise? - Possibly. 💵

One explanation for the massive capital flows into ETFs, even during downturns, is that investors are already pricing in future intervention by the central bank. ✔️

Not only economic data determines pricing, but also the expectation that someone bigger will support the market in an emergency. 🛡

But there's also a dangerous side to this -

If the market becomes convinced that the Fed will always save it, a "moral hazard" could arise. 🥸

Investors will be willing to take more risk -> stock valuations could continue to expand --> and any future bubble might become larger... ⛔️

Additionally, stock purchases by a central bank raise complex questions:

Will the Fed choose which sectors to support? 💵

Will it prefer companies that make capital investments? 💵

These are questions that don't yet have answers. 🤌

Does this mean we won't see 50% crashes anymore? 🤌

Not necessarily. 🩸

Even if the Fed intervenes in the future, it cannot completely prevent sharp declines, especially if the crisis originates from high inflation, a debt crisis, or a loss of confidence in the currency. ⛈

What it might do is significantly shorten the duration of the bear market and reduce the depth of the crisis, similar to what happened during the COVID-19 pandemic. 🦠

The real variable is not whether the Fed can buy stocks, but whether political and economic pressure will make this move inevitable... ⌛️

And the market? 📊

It's already starting to behave as if the answer is 'yes'. 🤑