At this point it has been made evidently clear that a trend of economic downturns that quickly followed their inevitable and respective stock market crashes, have taken over the world. Arguably, the most extraordinary one was seen in the United States of America, and while some state that troubles are over, given then 30%+ increase in the Dow since its March low, others suspect a comeback making its way, not so long from now.
The crash began in early March, when the Dow Jones Industrial average dropped the largest distance in US market history- since the black Monday of 1987- in a single day (20.3%), and closed at 23,553.22- a sharp fall from its mid February high. The 11 year bull market had officially ended and a bear took its place. It is no secret that the primary cause behind this replacement was the COVID-19 coronavirus pandemic, that resulted in the shutting down of all non essential businesses, and inherently scared off investors that were already apprehensive given the trade wars between the US and China. The next most important reasons behind this crash not only have to do with the oil price wars between Saudi Arabia and Russia, but also the “overbought” markets that were long due a strong correction.
Before we can dive right into the return of the crash, we must take a drive down memory lane and brush up on facts about the previous 13 bear markets in US. History. This year’s is already considered the 7th most severe bear market since 1929, as it saw the fastest bull to bear market transition in the entire century. While the great depression’s pre crisis decline developed in about 34 months, the coronavirus crisis took a mere 1.5. Based on the changing trends in this timeline, especially since 2000, the volatility of these crashes is said to be increased due to new technology that allows for instant remote trading and high-frequency algorithms, which can accelerate and exaggerate market movement. In comparison, 2020 also saw a substantially lower percentage rallying in stocks in the year preceding the crash. In terms of recovery, it took the Americans 25 years to recover post great depression, and 4 years post great recession. However, we’ve already seen a considerable increase in the Dow jones, within months for this year. For that sole reason, that it has been only 3 months, declines aren’t expected to stop anytime soon, but rather continue on further. Since a stock market crash and a recession usually come hand in hand, acknowledging the damage done to economies is quite important, and is also one of the main reasons as to why this year’s stock market crash sets itself apart from the others. We witnessed a 27% shrink in GDP through the great depression, and a 5% shrink during the recession of ’08. The Covid crisis however, showed a 4.8% shrink in just the first quarter itself, and is predicted to contract by about 30% in the second, perfectly complimenting the increasing unemployment figures which seem to be approaching the levels of the 1930’s.
Predicting the future of the stock market, pertaining strictly to 2020 and 2021, can be troublesome due to an array of of reasons added on top of the staple; Markets can be highly unpredictable and uncertain. The most obvious reason, pointed out by several officials around the world, has to do with the second wave of the virus. Without a vaccine, any country is susceptible to an increase in daily infections. However, the United States is unique in the sense that it is the outlier of the developed countries in terms of its daily confirmed cases curve. While nearly all developed countries have seen a secure decline, the daily infection rate in the United States has just levelled off in presence of businesses slowly opening back up. Taking into account the current climate in the country with all 50 states holding numerous and large protests in the name of the black lives matter movement, the second wave of the virus is quite probable. This second wave, may not have as great of an impact on the economy as the initial, but it will definitely have its own implications.
We also need to consider the path by which the United States is looking at recovery, in order to make predictions. The $2.2 trillion stimulus package the country announced, is the largest in American history, but its breakdown is what matters more. The bailout for small businesses and corporations is generous. However, for individual rent paying residents, the $1200 stimulus payment and an extra $600 per week (as an unemployment benefit) on average lasts for about 4 weeks. With the unemployment benefits ending by the end of July, and federal dollars in the hands of consumers running out, consumption spending will definitely take a hit, with mortgage, rental, and credit delinquencies increasing. As the states choose to open up non essential businesses based on their situations alone, it is unlikely that the entire country will restart together, which implies that- though not 33 million- a large population will still remain unemployed. This also has to do with the fact that many companies have filed for bankruptcy during this time, while some look to downsize, effectively creating lost jobs. The fear and greed index lands at 51 currently, an improvement from 1 in march, and with reduced consumer confidence, the number is projected to drop to around 20-30 in terms of investments as well.
As in any other election year, the 2020 presidential elections coming up in November, are expected to bring volatility to the market. Correctly explained by Bill Greiner, “High levels of stock market price volatility is a reflection of investors anxiety which serves as a self-reinforcing mechanism. As volatility rises, investor anxiety tends to rise, which leads to more volatility,” the stock prices liable to rapid change, generally create the repeating cycle that Bill Greiner explained. In a presidential year, it depends majorly on what candidate is anticipated to win as it gets closer to the D-day. With a deficit of above $4 trillion, taxes will indefinitely see a rise, and a large one at that. It rests on the views and promises of the candidates as to whether these taxes will find themselves added to personal incomes, or corporate revenues. While both of which have the potential to negatively affect the market, the repeal of the corporate tax cut act enacted in 2017, could actually create a greater risk.
It is important to note that given big tech companies consisting of Apple, Microsoft, Alphabet, Amazon, and Facebook, are major constituents of the S&P 500, they have the power to tip the scales in either direction. Any weakness shown by them in the Q2 earnings (April, May, June) as well as uncertainty for the rest of the year, could increase volatility, scare off investors, and create a loss of value in both the Dow as well as the S&P index.
We cannot disregard the measures taken by the fed and the government, as well as those that are in consideration for the near future. We are also more aware of the virus than we were months ago which could work in favour if and when any more adverse market situations were to come up. For those reasons, the second stock market crash may not be as historical and threatening as compared to the one in march, if it were to present itself in the next two years, specifically in the second half of this year. That being said, whether or not the crash is as grave, the government under the Trump administration and any other that may enter office this year, have to balance out their plate of responsibilities such that they do not in any way compromise humanitarian welfare, that has already suffered greatly during this crisis.
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