Wall Street has not reflected that fact at all in recent months, with the S&P 500 rising nearly 50% from its low on March 23 until today. After the 11-year record market bull run ended in a blink of an eye in March, a new rally occurred almost immediately. But has the recovery been too jubilant? Is the stock market going to collapse again?
Here’s a quick look at five risks that could threaten stock market gains in 2020. This article will briefly take a look at five potential risks that stocks face:
- A “second wave” of the virus.
- Long-term weakness in the labor market.
- Inadequate stimulation.
- Market dynamics: high valuations and high concentration.
- Political uncertainty.
Before we get into this, it is important to distinguish between a bear market, defined as a 20% drop from a previous high, and a stock market crash.
“I have been in the investment management industry for 36 years,” says Hank Smith, head of investment strategy at The Haverford Trust Co. in Radnor, PA. “During that time I witnessed what I would call two incidents: the one-day accident on October 22, 1987, where the Dow fell 23%, and this year, when the S&P 500 fell. 35% in 4 1/2 weeks. “
Smith points out that “(the crashes) are caused by exogenous events known as ‘black swan’ events. By definition, an exogenous event is off everyone’s radar screen. “
As the above risks are fairly well known, Smith believes it is rather unlikely that they will cause a total accident in the near future, according to Smith. However, the more important risks specific to this era should be well understood by anyone wondering if there will be another impending market downturn.
The most visible immediate risk to the economy is what triggered the 2020 stock market crash of 2020 in the first place: the pandemic.
“There is concern about the economy’s failure to recover,” says Brad Cornell, emeritus professor of finance at UCLA and senior advisor to Cornell Capital Group. If “the virus problem gets worse or vaccines don’t work or there is a second wave,” the risk of more prolonged economic despair – and a stock market hit – will increase, Dr. Cornell says.
Long-term weakness in the labor market
The August employment report found that 13.6 million Americans were unemployed, 7.8 million more than in February. Although the number of unemployed has decreased in recent months, the percentage of those who expect to be unemployed for the next six months is increasing.
“The greatest risk to staff is that leave or temporary unemployed people suddenly become permanently unemployed,” said Adam Coons, certified financial analyst and portfolio manager at Winthrop Capital Management.
Wall Street had been expecting a second big round of virus relief from Capitol Hill, although the partisan negotiations have come to a serious standstill in recent weeks as the gap between left and right seems increasingly insurmountable.
“If (a) other stimulus measures are not agreed upon in Washington, the reduction in consumption will start to trickle down through the economy as a whole,” Coons said.
“The Republican Party will find it increasingly difficult to deliver a bilateral message that the economy is recovering strongly, but we need stronger stimulus,” he said.
High valuations, concentrated profits
One thing that many analysts and investors love to see in a stock market rally is the breadth of the market – broad participation in different sectors and market that are doing well. This was not the case in 2020, where a sector and some large companies within it led the way. Big Tech was the beauty of the ball, with Apple (ticker: AAPL), Amazon (AMZN), Microsoft (MSFT) and Facebook (FB) easily outpacing the broader markets to date.
“Stocks in general, especially technology stocks, are pricey by historical standards,” says Cornell.
A new generation of investors has also entered the markets through free trading apps such as Robinhood which offers split stocks and commission-free trades. These features allow investors with less capital to participate in the stock market in ways that were previously not financially viable.
The uncertainty surrounding the general election
The last of the five risks highlighted that could cause a market crash is a political uncertainty. Investors know what to expect from a Trump administration, but how stocks would be affected by an administration led by Democratic presidential candidate Joe Biden is less clear.
Biden wants to increase corporate tax from 21% to 28%, which is often the fear cited around his election. At the same time, its infrastructure and green energy projects could inject hundreds of billions of additional dollars into the economy, which could help strengthen the labor market.
Not just the unknowns of a Biden presidency, but global geopolitical uncertainty of whether there would be a disputed or protracted election result is another, perhaps somewhat overlooked, risk.
Will the stock market crash again after the big rebound in 2020? It is certainly not something that can be clearly seen by the masses. However, some of the biggest risk factors that markets face, and any of them could make a significant contribution to an impending bear market.
That said, there are mitigating factors many market watchers, investors, and analysts that will help prevent another full market implosion. Most frequently cited? The Federal Reserve.
Following the recent Fed policy statement that interest rates were unlikely to rise until 2023, Wall Street is more confident than ever that the central bank will step in if necessary to allay fears, strengthen confidence and provide liquidity. inject.
“Never before in its history has the United States Federal Reserve made such an explicit long-term interest rate commitment,” says Nigam Arora, chief investment officer at The Arora Report.
“As a result of the Fed’s policy, traditional valuation metrics are obsolete, at least for the next year,” Arora says.
Arora is far from the only expert to point out the Fed’s unparalleled commitment these days. That said, the central bank can’t prevent every shock, crash, or sell-off in a free market system – no matter how hard it tries. And tax incentives cannot solve everyone’s problems either.