North American Stocks Expected to Tumble Nearly 20% in Upcoming Months

In February and March, North American and global stocks experienced a huge correction on fears that the coronavirus (COVID-19) would wreak havoc on the global economy. Those fears have come true, with the Canadian and American economies coming to a standstill. Despite terrible economic data, the stock market has been bullish. But there are growing concerns that stocks have risen too fast, too soon, and could experience another correction, tumbling nearly 20% and testing March lows.

Will the Stock Market Experience Another Correction?

North American stocks have been on a tear since bottoming in late March. The S&P 500 is up more than 25%, the NASDAQ has climbed nearly 30%, and the TSX has rebounded slightly more than 30%.

These gains come on the back of some pretty miserable coronavirus-fuelled economic data. Most notably, U.S. gross domestic product shrank 4.8% in the first quarter, far worse than estimates calling for a 3.5% retraction. On top of that, 36.5 million Americans have applied for unemployment benefits in just two months.

Canada’s economic data is just as bleak, with the country entering a recession in the first quarter. Keep in mind, most places only shut their doors in the closing weeks of March, which suggests the Canadian economy wasn’t doing that well to begin with. And second quarter GDP will be abysmal.

March GDP was down 9% which resulted in a quarterly GDP decline of 2.6%; the largest one quarter drop in GDP ever recorded. In April, a record 1.99 million Canadians lost their jobs as a result of the coronavirus. This comes after more than one million jobs vanished in March. As a result, the April unemployment rate soared to an eyewatering 13.0%, versus 7.8% in March.

It’s hard to imagine that stocks could continue to soar supported by this kind of economic data. According to Goldman Sachs Group Inc., investor fatigue and pessimism will take hold and send the S&P 500 down almost 20% over the next three months.

Why Are Stocks Climbing So High?

It appears as though investors have gotten ahead of themselves, with the fear of missing out trumping all of the negative economic news coming out of Ottawa and Washington. But why are investors ignoring what seems to be pretty obvious indicators that things are not going well?

There are a number of reasons why investors are, for now, optimistic about stocks.

• The stock market is a future indicator: Stocks are priced according to future expectations of how they will be performing in a month, six months, or even a year from now. The current economic data is awful, but once the economy opens up, investors expect the economic recovery to be swift.

• Tech stocks are skewing the markets: A lot of the so-called market recovery is coming from tech stocks. Tech behemoths Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corp. (NADAQ:MSFT), Facebook, Inc. (NASDAQ:FB), Apple, Inc. (NASDAQ:AAPL), and Google-parent Alphabet Inc. (NASDAQ:GOOGL) are all up more than 10% year-to-date. Together, they account for 21% of the S&P 500 and have helped send the NASDAQ into positive territory this year, despite the coronavirus destroying the economy. Canadian tech darling Shopify (TSX:SHOP)(NYSE:SHOP) has been one of the best performing stocks in 2020, at one point it had advanced more than 100% since the start of 2020.

• The economy has been flooded with cash and low interest rates: The economy is bad, but it could have been worse. The Federal Reserve flooded the markets with cash and lowered interest rates to virtually zero in an attempt to stave off a depression. The process is still in its infancy, though, with a return to normalcy still months or even years away.

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