Would the Market Crash Again?

By Armchair Banker on The Capital

An article popped up on my phone by NPR where the headline was “Millions of Americans Skip Payments As Tidal Wave of Defaults And Evictions Loom.” This article discusses how many every day Americans are skipping mortgage, auto loans, and other types of payments. COVID-19 has clearly affected America’s wallet. But another article popped up on my phone that made me think and write this article. This article was from CNBC where the headline was “There’s a ‘huge disconnect’ between the stock market and the economy. Here is why.” Of course, for many people who have been following markets and the economy, it is a well-known fact that the stock market has been disconnected from the overall US macroeconomy for a while. The COVID-19 crisis just further proved this thesis. Look at this image below and tell me what’s wrong? ( if you don’t find anything wrong with this picture, then congratulations!! You are one of the luckiest people in life. I further explain this below.)

Now let’s look at the fundamentals. The COVID-19 crisis has affected and destroyed so many lives. There is no doubt that this crisis will be in the history books. Now let’s look at the fundamentals:

  • 14.7% unemployment rate, the worst since the Great Depression
  • 38 million people claiming unemployment and millions more lacking health insurance
  • According to the US economic forecast, GDP could plummet a whopping 30%
  • 7.5 million small businesses are predicted to shut down due to the Corona Depression
  • Finally, the US leads the way in the most number of COVID-19 cases and deaths.

So far, the US does not have adequate testing and no progress has been made for a vaccine. Also, there is massive civil unrest throughout America. But the markets tell a whole different story. The S&P 500 is back up 38% since the market lows in March. As of May 8th, NASDAQ is larger than the rest of the world’s stock market (https://www.zerohedge.com/markets/nasdaq-now-bigger-rest-worlds-stock-market). Why is this?

The best answer I can give here boils down to income inequality. As of 2013, the top 1% of income earners owned 38% of stocks. The majority of Americans, unless through passive investment vehicles or retirement funds, are missing out from directly being involved with the stock market. The richest Americans also happen to be the least affected by the bad economy. Thus they are buying more stocks knowing good times are here to come (just as Bill Ackman!).

This pandemic is also proven how it’s great to be rich. (ok it has always been great to be rich!). This CNBC article was another one for the books (https://www.cnbc.com/2020/05/21/american-billionaires-got-434-billion-richer-during-the-pandemic.html). The richest Americans (or American billionaires) became $434 billion richer during the pandemic. Of course, these CEOs have more money for stock buybacks and other assets. (On a side note, the COVID-19 stimulus or the Cares Act mainly benefited the wealthiest earners).

Finally, as Chairman Jerome Powell of the Fed did a few emergency rate cuts. These interest rate cuts have benefited speculators more than savers (even with these rate cuts I cannot even refinance my home!).

Alright, now is the time I answer the question you all have been waiting for. Can the market crash again? According to my opinion (disclaimer below), there is a high probability of the market crashing again. Here is my take:

The US is already leading the world in Coronavirus cases and deaths. The current administration does not have a plan for either testing or a vaccine. To make things worse, many states opened up without any long term plan. Also, according to the former head of the FDA Dr. Scott Gottlieb, increase movement across the nation (mainly due to states reopening) and the current protests will bring in a much deadlier second wave. Even many health experts have mentioned that the second wave of Covid-19 can spread across the nation. As for the economy, according to analysts at the think tank Brookings, America’s economic recovery will be a U shaped (or a Nike swoosh style) recovery (https://www.brookings.edu/blog/up-front/2020/05/04/the-abcs-of-the-post-covid-economic-recovery/). A U shaped recovery means that even as restrictions ease and businesses reopen, people are hesitant to go out or visit commercial institutions. Thus the economic recovery will be a slow one.

Even many professional investors see the US market declining. Kevin Smith of Crescat Capital sees this current rally similar to the rally in 1930 during the great depression before the market hit its lows in 1932. Eric Peters of One River Asset Management, a hedge fund that mainly trades on volatility has mentioned that market volatility will not end soon. Last but not least, legendary investor and pioneer in emerging markets investing Mark Mobius on April 17th warned investors that global markets have not seen their lows. According to Mark, the current recovery has been too fast (and I agree). As companies around the world report earnings, equity sell-offs will continue (watch the full interview: https://youtu.be/CZ8RgvXKUD8). But even Mark’s emerging markets fund has been buying during the last market downturn.

Overall, I have given you enough information for you to digest. I do not time the market and in general, I do not recommend it {unless if you have some secret formula and if that is the case please give me a ring ;)}. But the macroeconomic fundamentals do not match the market. The market is doing its own thing but sooner or later the market has to face reality.

The information I have provided is for informational purposes only. I am not a registered investment advisor. Please consult a professional before making any decisions related to investing. Investing involves risk.

Last but not least, I have been researching passive income methods. I found this website called FeaturePoints where you can do various tasks (download apps or complete surveys for cash, gift cards, or Bitcoin). Please use this link — featu.re/Y2F2S5 — and go make some passive income.

Another last but not least, please give me a clap, share this article, and make a comment {please be civil 🙂 }. Take care, stay safe, and prosper!!

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