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Last week on Monday, the Dow Jones index lost more than a thousand points for the first time in history, a drop of 4.6%. This correction followed a decline in stock prices that had already started on the Friday before, although few investors had anticipated that the index would fall by this much. On Tuesday and Wednesday, stock prices seemed to recover somewhat, but on Thursday the most important indices in the United States fell again considerably.

Last week’s correction seems dramatic, but we should not forget that it comes off the back of an exceptional rise in January. At the time of writing, the Dow Jones is around 24,000 points, the same level as at the end of November last year. The broad S&P 500 index closed at just below 2,600 points on Thursday, which is also comparable to the level of just over two months ago.

We cannot speak of a huge panic, but the big question is how to go from here. Was this just a small correction in an upward trend? Or are stock prices heading down even further this year? Just like you, I do not have a crystal ball and cannot give investment advice either. Yet when I look at different indicators, the second option seems more likely to me at the moment. I will highlight a number of reasons why I think so.

Dividend Yields Versus Bond Yields

The yield on US Treasuries exceeds dividend yields for the first time since 2008 (source: Bloomberg)

But Isn’t the Economy Growing Again?

The Stock Market Is Overvalued

Price/earnings ratios rose to their highest level since the Dotcom bubble (source: Multipl)

Rates Hikes by Central Banks

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