Our puppy Winnie died last week and if I was a betting man, I would have bet that 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 because Winnie was mischievous and playful and in the end that worked against her.
Like many things, death itself is inevitable, as is another coming crash of the stock market. 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 the eight other bear markets (where the stock market drops more than 20 per cent) between 1926 -2017 has between 6 months to 2.8 years. Yet this recent stock market recovery has only taken 10 weeks. Many people have dived back into the markets with two feet and made significant returns on their investments. However, many are asking “can the stock markets sustain this rally?”
My belief is that the stock market is going to crash again and many small-time investors who rely on the market gains for their retirements are going to be caught. Here is why.
The stock markets have noticed significant rebounds on the belief that the economy is re-opening across North America and that everything is going to be back to normal. In fact, stock prices have rallied in recent weeks to regain most of their losses and their pre-crash values. Yet it is questionable what is sustaining those stock price values. Some are speculating that the period of quarantine has reinvigorated interest in day trading and stock market speculation. Others look to the unprecedented cash infusions to the marketplace by governments. This has driven share prices and enabled companies to return to pre-crash inflated share values while many commercial investors and fund managers have taken cash out of the market until the volatility subsides.
So where is the risk?
The current risk in the stock market comes from several areas. Firstly, the recent gains have been ventured on the reopening of the economy. The truth of the matter is that for the better part of three months, many companies had their businesses operating with a percentage of their normal sales. When the second quarter reporting comes out in July and August, many companies 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 is a significant chance that they are buying from companies listed on the stock market. Many businesses I work with have curtailed their spending and purchases, and are demanding better pricing from their suppliers. When this works its way through the market, whether it is this quarter or next quarter, investors are going to be disappointed with listed companies sales reporting and profitability.
Secondly, while there is good news that unemployment rates are dropping from the 20 per cent range a couple months ago to 10-15 per cent, many consumers are realizing that their spending habits were unsustainable and as a result, are changing their extravagant mindset. Consumer debt levels in many countries are at an all-time high. When threatened with long term unemployment, wage curtailments, and cuts to working hours, payment default is going to hurt financial institutions and all businesses that are extending credit to their customers. On top of this, over the next year, the public is going to comprehend that many businesses are not reopening or are not going to be able to pay their bills in an economically changed reality.
Thirdly, government stimulus cannot and should not be sustained. While the cash that was doled out by federal governments to all sectors of the economy was well 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 my belief is that there is considerable risk. If you are thinking of protecting your retirement funds, you may wish to have a conversation with your financial advisor. Just like death some things are inevitable. I might not have been able to predict the short life of my puppy, but I will go on record predicting a short-lived recovery of the stock market.
Dave Fuller, MBA, is an award-winning certified professional business coach and the author of the book Profit Yourself Healthy. Disagree with my prediction? Email dave@profityourselfhealthy.com
