The one thing certain in this world is that it is full of uncertainty. That is true now more than ever. People are scared of the markets and believe we are due for a recession. What about your assets? If you have invested at all, chances are you have invested in the stock market. You are probably scared of what your portfolio balance will be after all of this. Let’s face it though, if you wanted a solid balance you would not invest, you would save only. Any person who told you the stock market will do nothing but go up is a liar. You signed up for volatility and some temporary loses by investing. If you are reading this post you are concerned about the stock market. So let’s try to answer this question, will the stock market crash?
First, let’s get the obvious out of the way, no one can truly predict when the stock market will crash. However, stock market crashes like every market crash is inevitable. This post is not supposed to give you a calendar date for the crash. This post is supposed to explain that stock market crashes will happen, even after the next one. With this knowledge you can prepare your wealth in order to better forge it in the future, after this economic turmoil.
Earlier In 2020
The stock market technically crashed already. From its peak to its lowest point the S&P 500 dropped 34% in about a month. This is not quite recession level, but it was more than moderate. Such a drop is expected with a global crisis. However, does it actually reflect the economy? Think about it, this crash started in February, weeks before WHO declared Covid-19 a pandemic, and the US did not declare the matter a state of emergency until about a week after the start of the crash. So was the stock market just preemptive? In a way, the stock market is driven by investors’ emotions. Fear tends to be a great driver in the stock market. In other words, the stock market and economy do not respond in the same way.
Investors Try To Understand Where Their Money Is Going
It could be argued that the stock market bear was the preemptive response to the pandemic. That is if you believe emotions are the only thing that drive the stock market. Last I checked, even the most spontaneous stock investors actually try to know what they are investing into. If investors were purely spontaneous, there are probably tens of thousands of scams they would “invest into” before stocks. And there are hundreds of penny stocks they would probably buy as the “next big thing” before anything in the historically proven indexes. Many of the investors I know try to understand the general market trends or at least what the company they invest into produce. They respond to earnings per share, price, revenue, pretty much any number on a financial statement that could sway an investor’s decision.
So will the stock market crash? That depends on whether the financial statements look promising.
Will Equities Look Good This Year?
Every equity is different, but it is pretty safe to say that every equity has been affected by the Coronavirus outbreak. Some have been affected positively, more than some have been affected negatively. 24% of small businesses have temporarily shut down and 43% believe these shutdown will be permanent if things do not change within 6 months. However, government closure orders rather than typical economic troubles are the most likely cause. That being said, many of these businesses rely on supply lines that have been significantly disrupted. Even when the closures are less restrictive, businesses will not quite return to normal, less revenue is all but guaranteed.
For big businesses in the S&P 500, there will hardly be any difference except I would expect the financially responsible ones to be able to survive well past 6 months. Either way revenues are not likely to increase. However, if you read the FactSet report which claimed that they project a decrease in earnings in Q2, they also report many companies in the S&P 500 did better in Q1 than expected. This is normally a good indicator of growing economies and could explain the stock market rally. The ultimate takeaway is that while many large companies will feel a financial squeeze it does not look very likely that the majority of large companies will be crushed by this crisis.
If you like direct investing or investing into smaller and riskier businesses, you are all but certain to see a lower balance in your portfolio. In all fairness, equities of these types come with higher risks. Large cap stocks have less risk, but are far from completely immune. There are many equities I see as risky. These include companies that took out a large amount of debt to purchase stocks and raise stock prices to entice investors and those with a low amount of available cash. Some of these companies are due for a reckoning if they are not prepared for a shock in earnings or if they are not bailed out properly. Many of these companies are part of the S&P 500 and will most likely bring even risk-mediated mutual funds down. I believe the most optimistic path equity markets as a whole have is slight growth before the end of 2020.
Should You Buy?
Individual equities will grow and recede depending on investor opinions and their performance. You should buy or sell these based off their performance. Keep in mind, many of these investments are probably swayed more by investor opinions than their performance right now so maybe investing in stocks that have grown significantly recently is unwise. Their recent climb may lead to a crash. If you are new to investing, you should check only equities that have proven track records through recessions and maybe even then they will be too risky of investments. If you want to invest in these, only do so with money you can spare.
The pandemic affected the market too broadly for many equities to be completely immune and they all have some risk. Many sectors may have grown but still have risks. It is probably not wise to invest into something that optimistically will only grow slowly in the near future.
Before you take any steps to prepare for when the stock market will crash, you should ask a professional advisor. This is not a step meant for everyone. If you are questioning if the stock market will crash in the near future, you are probably feeling quite fearful. It is better to make a strategic decision with a healthy dosage of fear than to make an erratic decision based purely off fear. If you cannot handle the fear of losing value in stocks, you should probably settle for cash.
One of the arguments to avoid selling your stocks is the fear of missing out from gains in the stock market. But the fear of missing out always has two sides. You can look at it as missing out on gains or absorbing the losses for potential gains. That or you could look at it as missing out on losses or preparing to buy new lows. I like to think that I am preparing for new buying opportunities.
Are these opportunities guaranteed? No! If I knew this would work I would not have added the disclaimer. I would also be a trillionaire. However, I know the economy is in for a rough time. Not simply because some equities are overvalued, that happens very often and recessions do not happen just because investments are overvalued. They happen for various reasons just in different orders and the details are different. But greed, unwise investments, global crises, and oil price fluctuations seem to be among the central reasons.
If you are seeing this upcoming recession as a problem, you may make the wrong decisions in cashing your assets letting your emotions drive your decisions. If you see this recession as an opportunity to buy assets on sale, you could sell your assets with your decisions driven by strategy to later use the cash as opportunities to forge your wealth.