With the stock market finally beginning to align with economic realities, is there a chance that another stock market crash is on the way?
Yesterday, I came across an article on CNBC that read:
“Facebook is building a huge undersea cable around Africa to boost internet access in the continent”.
I would have loved to write about this ridiculous story and question just how Facebook (NASDAQ: FB) planned to undertake this venture. Not only does it sound like something Elon Musk and Tesla (NASDAQ: TSLA) would get up to, but apparently Google (NASDAQ: GOOG) also has similar plans.
But alas, Britain’s economy fell into recession territory, and the stock market had to go and steal the show with a bunch of worrying signs that are beginning to make me wonder if we are headed straight for another stock market crash.
— Bloomberg (@business) May 13, 2020
Troubling signs in troubling times
The stock market has been on a roll since late March, but after a week of sell-offs, we could be headed into a period of consolidation and choppy seas. Despite Thursday’s mini-rally, Fed Chairman Jerome Powell described the current pandemic-driven downturn as not having “any modern precedent,” and would be “significantly worse than any recession since World War II.”
There’s that word again — recession — like some foreshadowing omen of pestilence and plague. Of course, there is always someone claiming that the next recession is just around the corner, and as the old adage goes: “if you throw enough crap at the wall”, right? A market crash and a recession don’t strictly come as a pair, but it’s not uncommon.
Many analysts are of the impression that this is also an extremely overvalued market, and that stocks are on borrowed time. The first quarter round of earnings has not factored in the potential of Q2 being a bloodbath for stocks. Q1 was bad enough for the likes of Apple (NASDAQ: AAPL), Under Armour (NYSE: UAA), and any other companies with significant exposure to China, but Q2 will see the full effects of closures in Europe and the U.S.. Unemployment in the U.S. is rapidly approaching 25%, with close to 70 million out of work right now, GDP worldwide is shrinking, as we’ve already seen in China and the UK, and soon, people are going to be forced to stop spending money as more jobs are lost. Even Starbucks (NASDAQ: SBUX), an $80 billion company, is requesting a freeze on rental payments.
All this, and we haven’t even factored in the possibility that another wave of infections could be coming our way soon if we can’t find a vaccine.
These are the factors which will lead to a crash:
- Federal stimulus cash can only go so far before it cripples the nation in debt.
- Airlines such as Delta (NYSE: DAL) or Southwest (NYSE: LUV) can’t expect a typical bounceback any time soon, which applies to several industries, including cinema, restaurants, and hospitality.
- A second wave of infections is likely to come in the winter.
- Wall Street cannot provide proper guidance for anyone really this quarter.
- The Fed will be unable to prevent a recession.
Will there be a bounce back?
There will, of course, be a bounceback at some point, just not the way we imagine it. I’ve already mentioned that the likes of airlines and restaurants won’t go from 0 to 100 overnight, but alternative arrangements may be found.
The world has quickly adapted to the ‘new normal’ of Zoom (NASDAQ: ZM) and Slack (NYSE: WORK) filled days, and we are seeing many countries experiment with new social distancing measures. For example, Dutch restaurants are reopening and providing ‘dinner domes’ to diners as a private eating space. Many traditional restaurants have resorted to takeaway, airlines are considering leaving empty seat spaces, and more companies are adapting work-from-home protocols. Just this week, Twitter (NYSE: TWTR) announced that its employees can stay working remotely forever if they wish.
Whatever measures are taken, it will be a long time before companies resume pre-virus levels of business, as people adapt to the new and constant threat of a global pandemic.
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