Stock Market Crash

Is the stock market going to rise or fall?

With the current pandemic going on, there’s a lot of uncertainty in the stock market. After the major crash in late March 2020, the stock market has been on a massive rally. Over the past 2 months, it has regained much of its losses and some stocks have even reached new all-time highs. This rapid increase has dumbfounded many investors. In this post, I’ll attempt to analyse and give my opinions on the million-dollar question: Will the stock market continue to rise or will it face fall that leads to a massive fall?

Reasons for rise

There are many proponents who say that the stock market will never retest its lows of late March ever again. Over the past few weeks, these voices are getting louder and more common. The sentiment of investors are getting more bullish as compared to several months ago.

Unlimited Fed’s funding

Ever since the pandemic induced crash, the Feds has said multiple times that their powers are unlimited and they’ll do everything to help the economy. They have even started purchases junk bonds through ETFs in April in an attempt to help businesses. As of late May, their balance sheet stands at a massive $7 trillion.

This unprecedented aid from the Feds dwarf their response during the Great Financial Crisis 12 years ago. As a result of this unlimited quantitative easing, the markets are now currently flushed with the Fed’s money.

Undoubtedly, investor’s confidence in the market will get a huge boost as they now know that there’s a big brother who promised to help them regardless. The Fed’s essentially made a guarantee to bail out the stock market if it ever crashes. If you’re an investor knowing someone promised you the stock market will never crash, wouldn’t you just buy more into it now?

Swift aid from governments

This ties in with the previous point on the Fed’s monetary policy. Governments around the world have also come up with massive stimulus packages including Singapore. The governments have essentially distributed free money to people and businesses. Their reaction to the crisis was comparably much faster as compared to the GFC.

Businesses around the world are getting bailouts from governments especially from industries most impacted by this crisis. Companies that are bailed out will have their risk of bankruptcy reduced and can, therefore, increase investor’s confidence in them.

Lack of demand due to lockdowns

What happens when people are getting extra money from the government but they are unable to spend it due to quarantines at home? They save or invest it. Brokerages around the world are seeing record sign up numbers in recent months due to the volatility and interest in the stock market. With more people getting into the stock market, this will also mean that more money will flow into the stocks.

Market has already priced in

We also have to acknowledge the fact that the market is forward-looking. Assuming that the market is efficient, this will mean that investors have already taken into account the reduced earnings for the next few quarters.

If we look at the various sectors 1-year % price changes, we can see that it actually makes a lot of sense.

Most of the sectors that are down are the worst impacted sectors like Energy, Financials and Industrials. Information Technology and Health Care which carries a huge weight in the S&P 500 index is up naturally due to the fact that everyone is telecommuting from home.

We have to also remember that the stock market is not an exact representation of the economy. If we see from the 2009 GFC, the stock market recovered months before the economy started recovering.

Possibility of a V-Shaped recovery

As of late May, countries around the world are already starting to reopen their economies. We are starting to see shops reopen and even borders between countries reopen.

Australia has recently announced a Trans-Tasman travel bubble to allow safe countries to travel amongst themselves. More and more countries are looking to be included in them. Hard hit Italy has announced that they will start allowing EU tourists by June. Even Singapore recently announced a green-lane agreement with china for essential business travel with China.

Many countries around the world are even coming up with plans to open up tourism travel by summer. Although I think that’s overly optimistic, this shows that governments are eager to open up their economy. There are many people working hard to get the economy going again. It will be reasonable to expect economies to improve in the coming quarters.

Optimism of viable vaccine

It seems like every day there’ll be a report of a vaccine achieving a certain stage of development. To be honest I’ve stopped reading about them because there are just too many to keep track of. Although many of them turned out to be duds, we cannot ignore the fact that there are a lot of investments that are poured into the research of a vaccine.

Over the next couple of months, we can naturally expect more good news of vaccine developments and these will almost definitely increase the stock prices.

Reasons for Drop

We have to, of course, consider the flip side of the coin. There are also multiple obvious reasons why the markets might drop in the coming months ahead.

Second wave of infection

This is by far the biggest argument against the increase in the stock market which is a second wave of infection. As we have seen in past pandemics, it is very common to have multiple waves of infection. We have already seen this happen in multiple countries such as China and South Korea.

A second wave of infection will cause countries to have to go into lockdowns again. The initial optimism of reopening the economy will be dampened as companies are forced to shut down again. This will also create more uncertainty in investors on the future outlook of the economy in general as the light at the end of the tunnel will appear to move further away again.

Earnings not reflective of impact

In the recent Q1 earnings reports, many companies have reported better than expected earnings. This is due to the fact that the economy was only really affected towards the end of March. The main impact will only be felt after April which is Q2. Many companies have also withdrawn their guidance on Q2’s earnings as the situation is too volatile for them to predict anything. We, therefore, do not know yet the real impact of the pandemic on the economy.

Many felt that the increased optimism was delusional and would be burst once the full impact of the lockdowns are realized.

High unemployment rate

In the US alone, the unemployment rate has skyrocketed to almost 15%. The unemployment rates during the GFC is not even comparable. The only other time unemployment reached this level was during the Great Depression when unemployment rates reached 25%.

COVID-19's Initial Impact on Employment | CSBS

With such a high level of unemployment rate, people will not be able to consume as much. This will, in turn, lead to a reduction in earnings for the companies as their sales decrease. A higher level of unemployment rates will also lead to a bunch of social-economic issues which might dampen investor’s sentiments.

Another black swan event

With the economy already beaten down as it is, another unexpected black swan will likely cause an outsized impact on it. There are many potential black swan events that are brewing such as the increased US-China tensions and Hong Kong’s National Security Law.

Although it is very difficult to predict a black swan event, we have to acknowledge these factors and monitor any of such news carefully.

So what is going to happen?

The above are just some of the factors I can think of. There are probably countless other factors that can swing the markets in either direction. If you’ve read till here, you must be really frustrated. I’ve yet to answer the ultimate question – Is the market going to rise or is it going to fall? Should I buy now, or should I wait for the ultimate crash to catch the bottom? My answer is that I don’t know and I will not claim that I know.

For every article out there that claims that the market is going to drop, there’s probably another that claim that it will rise. The market right now is simply too unpredictable for anyone to make any rightful claims. There are countless of professional analysts out there making claims about how the market will go.

No one has a crystal ball and no one knows for certain what the future will be in the next few months. However, as someone who is bullish in the long term US economy, I’ll continue to hold onto my existing assets.

I’ll leave you with this famous quote.

“Time in the market is better than timing the market.”

If you’re looking to purchase stocks during this period of time, check out my recent reviews of brokerages such as FSMOne and Firstrade. These brokerages cater to Singaporeans who want to trade in overseas market such as the US stock exchange.

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