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Is the Epic Stock Market Crash of 2020 Officially Here?

Last Updated September 23, 2020 1:27 PM
Harsh Chauhan
Last Updated September 23, 2020 1:27 PM
  • The stock market crash of 2020 may have begun.
  • The U.S.-Iran tensions may lead to a sustained drop in major indices.
  • Weak corporate earnings this month can ensure that the drop continues.

It wasn’t long ago that my colleague Laura Hoy warned that an epic stock market crash could be coming in 2020 based on Wall Street’s warnings. It looks like the bad times are already here as the Dow Jones’ bloodbath last Friday showed us. And if you thought that was a one-off bad day for the stock market and things will get better soon, you would be wrong.

That’s because the stock market is set for a crash once again today. Dow Jones futures are substantially down and it won’t be long before we see bad days for the stock market on a regular basis – heralding the arrival of a sustained crash. I say that because U.S.-Iran tensions could turn into a full-blown war and kick off a series of events that will ensure the current stock market crash lasts for a prolonged period.

Protracted U.S.-Iran tensions will send the stock market crashing

It is evident by now that the stock market is wary of a protracted conflict between the U.S. and Iran as Friday’s crash shows us. With no side showing signs of stepping back, it is likely that investors will continue to buy safe assets such as gold and bonds. Not surprisingly, gold prices have surged close to six-year highs , while bond purchases are also inching up.

It is easy to understand why investors have been dumping stocks over the past couple of days. Corporate earnings growth in the U.S. slowed to a trickle in 2019. The S&P 500’s earnings grew just 1.1 percent last year after 2018’s impressive growth of 22.7 percent, according to Refinitiv data .

The phase one agreement between the U.S. and China that brought the trade war to a halt was expected to boost the S&P 500’s earnings this year. Refinitiv projects 9.6 percent growth in S&P 500 earnings this year, but that’s under threat now thanks to the Iran conflict for a simple reason.

Chart showing WTI crude oil futures.
WTI crude oil futures have jumped thanks to the U.S.-Iran conflict. | Source: Bloomberg

U.S.-Iran tensions have sent oil prices soaring of late, creating a headwind for the stock market rally we saw at the end of 2019. Higher oil prices will lead to an increase in the cost of doing business, thereby leading to a drop in corporate earnings in the U.S. At the same time, higher gas prices at the pump will reduce discretionary expenses by consumers.

This could negatively impact retail spending and weigh on the top lines of corporations, which will spell disaster for the stock market given the current valuation levels. The S&P 500’s forward earnings multiple of 18 is higher than the historical average of 15-16. If the S&P 500’s earnings fail to clock the anticipated growth this year, investors will continue to dump stocks and move their money into safe-haven assets.

Earnings Scout – which analyses corporate earnings trends – founder Nick Raich believes that a majority of S&P 500 components will lower their earnings guidance in the coming months and weeks .

So don’t be surprised to see a shrinking bottom line weigh heavily on the stock market’s performance and ensure that the recent crash continues for a prolonged time.

The chorus for a crash keeps getting louder

The bad news for equity investors is that the calls for a stock market crash have surprisingly gained ground in recent days. Macquarie Investment Management CIO Brett Lewthwaite told the Financial Times that :

There are plenty of factors that could negatively affect the markets, including the 2020 US presidential election, geopolitical flare-ups or natural disasters.

Consequently, there is certainly the potential for a 10-15 percent stock market pullback for any number of reasons at any time during 2020, and investors should recognize that possibility.

Wells Fargo Securities is also anticipating a double-digit retreat for the stock market this year.

Stock market bull Ed Yardeni has also provided an ominous sign. He recently told CNBC (via Business Insider) that a major correction could happen in the early part of 2020 :

“I’m concerned about a possible melt-up here,” Yardeni told CNBC. “[A] 10% to 20% [correction] would be quite possible if this market gets to 3,500 well ahead of my schedule.”

The bad news is all these doom-and-gloom predictions are already coming true. The Dow Jones has started heading south, indicating that the stock market crash of 2020 is officially here.

Chart showing Dow Jones Industrial Average.
The Dow Jones has been heading south and the trend seems set to continue. | Source: Yahoo! Finance

With geopolitical tensions on the rise and the earnings season just a few days away, there’s a strong possibility that the recent stock market carnage will continue if the current scenario persists.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Modified: The article has been edited for clarity.