Put on your seatbelts, because you’re in for a bumpy ride!!!
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In June, I wrote about the possibility of a market crash happening. This was a time when the market was rallying while the economic fundamentals did not make sense. This was a time when COVID was really bad.
So are we going to face that reckoning soon??
The markets today (10/26) took a hit. The Dow fell 650 points (2.3%), the S&P fell by 1.9%, and the NASDAQ fell by 1.6%. So many are wondering whether if the worse yet to come? This is my take.
I do believe that market turbulence is here to come. Already we saw a big down day today. Hare are several catalysts that will make the market fall:
- The current increase in COVID cases: Covid cases are rising at an alarming rate. People are fearful that a rising COVID can shut down the economy again like what happened this spring. Shutting down businesses mean more layoffs (increase unemployment) and less to no incomes for millions of people. The current unemployment rate is 7.9%. A second shutdown will increase the unemployment rate and devastate the market. COVID has already affected Halloween shopping (no one wants to get candy from strangers during a pandemic) and there will be no Black Friday.
- Stimulus drama: Currently, the government is debating the stimulus. President Trump would prefer a stimulus before the election while Speaker Pelosi does not want trump to get a “win” before the election. Current market volatility has been affected by stimulus talks. The passing of some sort of stimulus will definitely let the markets go up. I believe that Congress and the White House are too divided to pass a stimulus bill (but I can be wrong).
- Election fears: The election drama is definitely affecting the markets. JP Morgan has already come out saying that a Trump re-lection is good for the markets. I agree with this take. Trump has been the best thing to ever happen to the markets. Pro-business policies like opportunity zones and the 2017 Trump tax cuts have boosted confidence in the markets. Even with a trade war with China, the markets have boomed. As Democrats are known to be less business-friendly than Republicans, a Biden election can lead to a market crash (I am not being partisan, I am just stating my conclusion after listening to many analysts. JP Morgan’s view is also shared by fund manager Mark Mobius). The markets fell after Obama’s reelection in 2012. The worst-case scenario is if there is no winner on November 3rd. If that happens, then get ready for armageddon in the markets.
These catalysts above are the 3 main catalysts many analysts are mainly discussing. But there are 2 more catalysts that are not talked about but should be noted by investors.
- Increase in US-China tensions: This is a catalyst less spoken about but I do think is something investors should care about deeply. Just today China sanctioned Raytheon, Lockheed Martin, and Boeing for arms sales to Taiwan. China has built up its Navy and expanding military power in the South China Sea. The US Navy is also increasing its presence in the Soth China Sea. A showdown between the superpower and emerging superpower can definitely make the markets go haywire.
- US Dollar Crash: Yale University economist Stephen Roach has warned about a dollar crash. He further mentioned that the US Dollar’s “exorbitant privilege” is coming to an end soon. As the US response to the COVID crisis further erodes the US economy and China’s economy recovers, people will be less confident about the US economy and possibly find alternatives to the US and US Dollar. This will not happen in a few weeks. But the US Dollar losing its reserve status will decimate markets.
The markets have continued to rise. This rise has mainly lead by tech stocks. Google, Apple, Amazon, and Microsoft are now larger than the whole Japanese stock market!!! After the big market collapse in April, the market learned that COVID will be with us for a while and business has still to go on. Also, increase stimulus, more QE, and cutting interest rates have boosted the market. But the fear of a crash is back.
Many professional investors are sounding the alarm. Investing legend Jeremy Grantham has warned that the US stock market bubble will pop soon.
I mentioned in my previous article that even with bad economic figures and increasing COVID cases, the market was continuing to rise. Basically, the fundamentals did not match market performance. It is still the case right now. As of September 17th, 860,000 additional Americans applied for unemployment benefits. A total of 12.6 million people are collecting traditional unemployment benefits. Many CMBS borrowers are handing back their keys. Many of these properties are lodging and retail. The economic downturn and the pandemic have made Americans not go to shopping malls and travel. Work from home orders will also affect office real estate. Another concern, especially with restaurants, is that as the weather gets cold the inability to have outdoor dining will affect restaurant revenues and their ability to operate.
The markets, led by tech, have gone up like crazy. Oil, some retail and restaurants, and retail and lodging REITs are a few of the stocks that are still in their lows. But as the weeks go by, watch out for the catalysts above. I have bought a few Gold ETFs to protect my portfolio. To play the coming weeks, I highly recommend looking at the volatility ETFs. Also, watch out for the crypto markets. Bitcoin has gone up over the past few weeks, and as people lose confidence in stocks and bonds, more money will be flown into the cryptos. Put on your seatbelts, because you are in for a bumpy ride.
I am not an investment advisor, and this is not investment advice. Investing involves risk. Please consult a professional before investing.
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