Investor Fear of Pandemic Second Wave Could Cause Stock Market Fall

Investors’ fear of pandemic threatens the stock market’s recovery, but the picture isn’t as bleak as it appears at the surface.
US stock market
Are investors' fears of pandemic overblown? The data are mixed. | Image: REUTERS/Brendan McDermid
  • Bank of America’s Fund Manager Survey finds that a second-wave pandemic is the biggest fear among investors.
  • Combined with a widespread belief that stocks are overvalued, such fears could spark a stock market fall.
  • However, the fear of a second wave has decreased in recent months, as has the flight to cash.

Investors rank a pandemic second wave as the biggest tail risk threatening the stock market, Bank of America’s Fund Manager Survey has found.

Forty-nine percent of global fund managers put a second wave as their most significant risk. That’s higher than any other risk, highlighting how the economic recovery from the pandemic is still uncertain.

49% Think COVID-19 Second Wave Could Derail Economy

Published monthly, the Bank of America Fund Manager Survey measures investor sentiment across a range of areas.

Most notably, June’s survey found that fund managers are most concerned about the possibility of a pandemic resurfacing.

Coronavirus second wave investor fear stock market fall
A German financial journalist tweets a chart showing the evolution of fund manager fears over time. | Source: Twitter

However, the fear of a second wave was just the tip of the iceberg. Only 18% of fund managers expect a quick V-shaped recovery from the pandemic. Meanwhile, 53% believe that recent stock market gains were a “bear market rally.”

On top of this, 78% of fund managers think the stock market is “overvalued.” Incredibly, that’s the highest percentage since the survey began in 1998. It’s even higher than percentages for the dot-com bubble, when the Nasdaq plunged 77% by October 2002.

Coronavirus second wave stock market overvaluation tweet
Investment strategist Liz Ann Sonders tweets a graph charting equity overvaluation since 1998 (as per BoA’s Fund Manager Survey). | Source: Twitter

Stock Market Fall

These findings sound a warning bell for the stock market. The combination of fearful investors and the belief that stocks are overpriced could lead to a broad market selloff.

If they sell at scale, this will reverse the stock market’s recovery since March 23. Since then, the S&P 500 and Dow Jones have recovered by 36% and 38%, respectively.

Dow Jones and S&P 500 chart
The S&P 500 (light blue) and Dow (dark blue) since late March. | Source: Yahoo!

The two-and-a-half-month recovery has been based mainly on Fed quantitative easing. Analysts at firms such as Citigroup are already warning of a stock market bubble. Citigroup’s Panic/Euphoria Index has risen to an 18-year high in recent months, drawing further parallels to the dot-com bubble.

Given that the market is so sensitive right now, all it could take is for a few major funds to sell stakes. And once a few big investors begin selling, much of the market could follow.

Some Reassurance?

While the situation is still extremely fragile, it might not be as bad as initially feared.

To begin, investors are reversing their earlier flight to cash. As this month’s Bank of America survey found, June saw the most significant decline in cash balances since August 2009. Average cash levels are now down to 4.7%, from 5.7% last month, and 5.9% in April.

Rise in cash levels tweet
Average cash levels rose to 5.9% in April, but have since climbed down. | Source: Twitter

It’s also worth noting that the percentage of fund managers fearing a pandemic second wave has shrunk. In April, 57% of fund managers feared the dreaded second wave; in May, this figure was 52%.

Combined with the tentative reopening of the U.S. and global economy, such a reduction in fears should protect the stock market. Yes, things could suddenly go south quickly if global infection rates spike. But for now, the picture isn’t too bad.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.

Sam Bourgi edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

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