When the U.S. stock market was rallying earlier this month, BlackRock CEO Larry Fink warned against mass bankruptcies and a potential tax rate hike. His prediction is now becoming true, as rental car giant Hertz filed for bankruptcy.
Hertz was valued at around $2.8 billion as of February 2020. Within three months, its stock price fell from $20.25 to $2.84 by 86%.
Multi-billion dollar conglomerates are starting show signs of trouble as large lay-offs soar despite the U.S. government’s move to reopen the economy.
In the past week alone, tech giant IBM , publication The Atlantic , St. Mary’s University , ride-hailing platform Uber , engine maker Rolls Royce among many other companies announced company-wide lay-offs.
When the largest companies in their respective sectors are aggressively reducing their workforce, it shows how challenging it currently is for small to medium-size businesses.
The U.S. stock market saw a decent recovery since the first week of April as a result of an abrupt upsurge in retail investors.
But, the backbone of the U.S. economy is small businesses and many of the 30.2 million small companie s are at a severe financial risk.
The short-term rise in appetite to trade stocks among new entrants is not enough to solely sustain the momentum of the stock market.
SentimenTrader said :
It’s a retail investor trading orgy. The number of accounts, trading activity, and options speculation has never been higher among the bored-at-home-wearing-sweatpants crowd.
Billionaires and hedge funds are increasingly hedging their positions as they predict more downside.
High net-worth investors like BlackRock’s Fink are looking at the economic data and are concerned about the uncomfortable reality that is inevitable bankruptcies.
Retail investors are continuing to buy at a relatively high valuation. But, when there is no smart money at the end of the tunnel, it can cause a steep downtrend.
The confluence of rising unemployment claims and bankruptcies of small to medium-size businesses is already imposing heavy selling pressure on the stock market.
Amid the existing chaos, geopolitical risks are only intensifying.
Hong Kong’s dispute with China on the implementation of the security law, which would provide China with greater authority over the region, triggered a political dispute between the U.S. and Chinese governments.
On May 25, U.S. Secretary of State Mike Pompeo warned China that the U.S. may impose sanctions if the security law comes into effect.
Pompeo said :
And if that happens there will be sanctions that will be imposed on Hong Kong and China.
There were pre-existing concerns that China may not be able to reach the phase one trade deal due to declining exports and business productivity.
As the U.S. and China battle on a wide range of issues, the trajectory of the phase one trade deal between the two nations becomes more uncertain.
The U.S. stock market faces a myriad of both internal and external risks in the near-term as economies in Europe and Asia start to reopen.