Is There Going to Be Another Stock Market Crash?
Over the last number of months, tech stocks led the markets to record territory. The unprecedented run during the historically quiet summer months surprised many investors. But after stocks cratered in March on coronavirus fears, few expected stocks to experience another crash or correction. The big question is: Are we in for another stock market crash or are we just experiencing a much-needed stock market correction?
Stocks entered September on the heels of a five-week winning streak, providing investors with an increased sense of optimism that the good times would continue. But September has never been kind to stocks—especially when they’re overvalued. In fact, as we noted in a previous article, on a seasonal basis, September is the worst month of the year for stocks. And 2020 is no exception.
In the opening days of September, tech stocks suffered their worst week since March. On September 8, the Dow Jones Industrial Average cratered 2.3%, or more than 600 points, the S&P 500 tumbled 2.8%, and the tech-heavy Nasdaq lost 4.1% of its value and officially entered correction territory.
Some analysts have noted that the stock market was due for a correction and that the sell-off does not mean the rally is over. Stocks are overvalued, but, they are, according to optimistic analysts, well below levels seen at the height of the dotcom bubble in the late 1990s.
While that is certainly true, it’s probably not the best idea to use the nosebleed dotcom valuations of 1999 and 2011 as the benchmark of where stocks need to be before investors get worried. The fact is, the market is flashing warning signs of another stock market correction.
First, the stock market rally has been mainly juiced by the outperformance of a handful of large tech stocks, like Netflix Inc, Microsoft Corporation, Facebook Inc., Alphabet, Amazon.com Inc., and Apple Inc. Collectively, these stocks account for more than 25% of the value of the S&P 500. And because the S&P 500 is a market capitalization-weighted index, these stocks are mostly responsible for the S&P 500’s epic run.
Are Stocks in a Bubble?
If these stocks are removed from the S&P 500, the index is actually in negative territory. This is the classic definition of a bubble. Stock market bubbles form around individual stocks and sectors, which, like the ripple effect, drags other stocks higher.
It also proves that the record stock market rally does not reflect the economic health of the broader economy. Stocks were in record territory despite the worst economic environment since the Great Depression. Eventually, fundamentals will matter again, and stock market prices will recalibrate lower.
Second, stocks have been climbing higher because of unprecedented fiscal and monetary stimulus. The Federal Reserve has said it will keep interest rates near record lows for years. That will continue to send yield-hungry investors into stocks, who, we have seen, have no problem sending even mediocre stocks significantly higher.
Where stocks will head in the coming months will be determined, in part, by the amount of fiscal stimulus. If there is no stimulus, such as tax cuts or spending on infrastructure, it’s possible that a stock market correction could take stocks back to their March lows.
The stock market also does not like uncertainty. And there is a lot of uncertainty surrounding the U.S. election. If a winner of the Presidential election is not announced in early November, the global markets could react badly. If neither candidate concedes, it could get even worse.
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Stocks entered September at record levels. But that trajectory was upended in the second week of the month with all of the major indexes plunging, and the Nasdaq in correction territory. And there is every indication that the stock market correction is not over yet. But investors shouldn’t be afraid to invest during a stock market crash or even extreme volatility. The trading experts at Learn-To-Trade.com understand that this environment is actually providing investors with opportunities to profit.
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