Why the stock markets will crash

We have yet to see the damage done to corporate balance sheets. And many consumers will constrain their spending

David FullerOur puppy Winnie died last week.

If I was a betting man, I would have said Winnie would have lived to the ripe old age of 12 years old, which is the average life expectancy for a bichon frise.

That, however, didn’t come to pass. Winnie was mischievous and playful, and in the end that worked against her.

Like many things, death is inevitable. So is another stock market crash.

Recent weeks have seen an incredible rebound in the North American stock markets after the COVID-19 crisis. In fact, few could have predicted such a quick recovery.

The length of time it took for markets to recover after eight bear markets (where the stock market drops more than 20 per cent) between 1926 and 2017 has between six months to 2.8 years.

Yet the recent market recovery only took 10 weeks.

Many people have jumped back into the markets with two feet and made significant returns on their investments.

However, many are asking if the stock markets can sustain this rally.

I think the market is going to crash again and many small-time investors who rely on market gains for their retirements are going to be caught. Here’s why:

The stock markets have noticed significant rebounds on the belief that the economy is reopening across North America and that everything is going to be back to normal. Stock prices have rallied in recent weeks to regain most of their losses and pre-crash values.

However, those stock price values are being sustained by questionable factors.

Some speculate that the period of quarantine has reinvigorated interest in day trading and stock market speculation.

Others look to the unprecedented cash infusions in the marketplace by governments. This has driven share prices and enabled companies to return to pre-crash inflated share values. However, many commercial investors and fund managers have taken cash out of the market until the volatility subsides.

So where’s the risk?

It comes from several areas.

First, the recent gains have been ventured on the reopening of the economy. But for the better part of three months, many businesses have operated at a percentage of their normal sales. When the second quarter reporting comes out in July and August, many are going to show significant losses and this will drive share prices down.

Even if a company isn’t reporting on the stock market, there’s a significant chance that they’re buying from companies listed on the stock market. Many businesses I work with have curtailed their spending and are demanding better pricing from their suppliers. When this works its way through the market, whether it’s this quarter or the next, investors are going to be disappointed with listed companies’ sales reporting and profitability.

Second, while it’s good news that unemployment rates are improving from the 20 per cent range a couple months ago to 10 to 15 per cent, many consumers are realizing that their spending habits were unsustainable. As a result, they’re changing their extravagant mindsets.

Consumer debt levels in many countries are at all-time highs. When people are threatened with long-term unemployment, wage curtailments and cuts to working hours, their payment default is going to hurt financial institutions and all businesses that have been extending credit to their customers.

And over the next year, we’ll discover that many businesses aren’t reopening or aren’t going to be able to pay their bills in an economically changed reality.

Third, government stimulus can’t and shouldn’t be sustained. While the cash that was doled out by governments to all sectors of the economy was needed and much appreciated, that cash has been spent. Businesses have taken on more debt and while some of this is forgivable, much of it isn’t.

Investors looking at financial statements are going to need to adjust their valuations.

Yes, there are opportunities in the stock market. However, I believe there’s considerable risk.

If you want to protect your retirement funds, you may wish to have a conversation with your financial adviser.

Just like death, some things are inevitable. I might not have been able to predict the short life of my puppy, but I will predict a short-lived recovery of the stock markets.

Troy Media columnist David Fuller, MBA, is a certified professional business coach and author who helps business leaders ensure that their companies are successful. David is author of the book Profit Yourself Healthy. Disagree with my prediction? Email dave@profityourselfhealthy.com

© Troy Media


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