WILL STOCKS FALL AGAIN IN 2020?

Updated: Jul 6, 2020


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Summary:

  • The total number of Covid-19 cases stands at 2,959,188 in U.S, highest in the world.

  • U.S (GDP) decreased -5.0 percent in first quarter 2020.

  • U.S unemployment rate at 11.1%.

  • U.S goods and services deficit increased from $49.8 billion in April to $54.6 billion .

  • Correction in the stock market is inevitable.


The shock of the coronavirus pandemic caused the stock market to crash in March 2020. Despite, the surging number of Covid-19 cases, which stands at 2,959,188 (highest in the world) and dismal economic data, the stock market has recovered swiftly from the crash of March 2020.


Given the volatility in the stock market prevailing due to the pandemic, the investors need to consider that will the stock market fall again in 2020?


Why did the stock market went up?


The swift recovery of the stock market can be attributed to the dovish fiscal policy of the Fed, and the huge amount of liquidity injected into the financial system. Fed's unlimited quantitative easing (QE) helped the stock market to remain calm and surge upwards.


'Don't fight the Fed', a popular notion on the Wall Street, the notion simply that Fed is providing liquidity to the markets, it should be viewed as an overall positive for the stock market, but for how long the Fed can continue to provide liquidity to the market?


Fed cannot continue to provide unlimited quantitative easing (QE) forever. Unlimited quantitative easing (QE) would result in inflation, even worse, hyperinflation. The quantitative easing (QE) will have to eventually stop.


Will the stock market crash again in 2020?


No one knows whether the stock market will go up or crash again, however, there is consensus that the stock market is overvalued at the moment, and the correction in the stock market is probable.


The U.S (GDP) decreased -5.0 percent first quarter 2020:


The real gross domestic product (GDP) decreased -5.0 percent in the first quarter of 2020, according to the “third” estimate released by the Bureau of Economic Analysis. Economists are predicting that the second quarter 2020 will be worse.


Growth in the real gross domestic product (GDP) is paramount for job creation, and any decrease in the real gross domestic product (GDP) would result in a higher unemployment rate.


The U.S unemployment rate:


The U.S economy is largely dependent on consumer spending, roughly around 70 percent of U.S economic growth can be attributed to the consumer spending. With millions of Americans out of work, the real gross domestic product (GDP) cannot return to growth, it's a vicious circle.


The road to recovery of the U.S economy is long and uncertain at the stage. U.S will not return to its fourth quarter 2019 real gross domestic product (GDP) until at least 2022, according to Christophe Barraud, chief economist of the broker-dealer Market Securities.

Christophe Barraud, chief economist of the broker-dealer Market Securities has been as Bloomberg's most accurate of U.S economic data for eight years in a row.


U.S goods and services deficit increased from $49.8 billion in April to $54.6 billion:


Exports of goods and services decreased $6.6 billion, or 4.4 percent, in May to $144.5 billion. Exports of goods decreased $5.5 billion and exports of services decreased $1.1 billion.


The decrease in the export of goods and services will hurt profits. The exports of goods and services is likely to decrease further in the second quarter 2020, and ultimately having an adverse impact on the revenue and profit margin of U.S businesses. Massive layoffs are likely after the second quarter 2020 earnings season.

The stock market has not priced in the gloomy economic data, and other risks such as the 2020 election, earnings and surging Covid-19 cases.


Even if the vaccine is ready by the end of the year, it is not likely to be distributed until 2021. A recovery to the pre-pandemic level is not likely to happen anytime soon.


The gloomy economic data and the uncertainty will spark a correction in the stock creator. Nasdaq is close to all-time highs, there is no room for despondency, a correction in the stock market is inevitable, sometime in July or August.

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