A stock market crash can be generally defined as when a stock market falls over 10% in a day. The last time the Dow Jones crashed over 10% was in March 2020. Since then, the Dow Jones has tanked over 5% only once. However, a stock market crash is likely to happen very soon, which may crush the 12-month gains for the Dow Jones and for the S&P 500. Here is why.
Coronavirus is mutating, and the new variants are more transmissible than the previous ones, which is forcing lawmakers to implement more restrictive measures. The United Kingdom is back in a national lockdown, and this is the third national lockdown since the coronavirus pandemic begun. Of course, the U.K. isn’t the only country that is having a third wave of national lockdowns; we have witnessed this in the Republic of Ireland and a few other countries extending their current lockdowns.
The biggest economy of the Eurozone, Germany, is struggling to keep control of the coronavirus, and there are higher chances that we may see a national lockdown there too. The factor that is most worrisome is that the coronavirus situation isn’t becoming better in the U.S., and it is evidently clear that President-elect Joe Biden prioritizes public health first. So, if we see a national lockdown in the U.S., the game may be over.
Major Reason For Stock Market Rally
The stock market rally that we saw last year was chiefly due to the faster than expected economic recovery in 2020. The U.S. labor market started to bounce back much quicker than many thought; the U.S. unemployment rate fell from double digits to the single-digit territory. As a result, stock traders became a lot more bullish. In addition to that, the positive coronavirus vaccine news flow further strengthened the stock market rally. However, both of these factors have lost their gravity.
First Warning For Stock Market Rally
The U.S. Weekly Jobless Claims have started to show that the U.S. labor market has taken a wrong turn and more people are losing jobs once again—although yesterday’s number was better than expected, actual 787K vs. the forecast of 798K. The labor market recovery that pushed stocks higher and made stock traders more optimistic about the stock market rally isn’t the same. The recent U.S. ADP Employment number came in at -123K, against the forecast of 60K while the previous number was at 304K. Of course, this was building up for some time, and the weekly Unemployment Claims number is warning us about this. Hence, under the current circumstances, it is going to be really difficult for the Dow to continue its massive bull run—reality will catch up, and the stock bubble is likely to burst.
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Second Warning For Stock Market Rally
Vaccine distribution has ramped up more slowly than expected, and it is likely to take some time before a meaningful population will get the first dose. Basically, the longer it takes for governments to vaccinate the public, the greater the uncertainty. We had already seen a small episode of this at the beginning of this year, precisely on January 4 when the Dow Jones stocks tanked.
Stock Market And Bankruptcy Filings
Another important factor that needs stock traders’ attention is the number of bankruptcies taking place in the U.S. This is really critical, and neglecting this is likely to catch stock traders off guard, and that may lead to a stock crash. According to Bloomberg, annual U.S. bankruptcy filings in 2020 surged to their biggest number since 2009. Since many corporations have been able to minimize the damage caused by the coronavirus pandemic by ballooning their balance sheets with debt, any further lockdown or restrictive coronavirus measures will weaken their balance sheet. They may not have any other option left but to file for bankruptcy, and this can lead to stock selloffs.
In summary, I agree that there are chances that optimism about more stimulus may continue to fuel the stock rally, but under the current circumstances, there are higher chances of a correction to a stock market crash before we see another massive bull run.