The Writing Is on the Wall for a Stock Market Crash. Can Investors Read?

May 20, 2020 10:26 PM UTC
The stock market is trading as if a V-shaped recovery were a certainty when in fact it's very unlikely.
  • The economy may have reached a bottom, but the stock market hasn’t.
  • At some point, the stock market has to reflect the reality of the U.S. economy.
  • The quick recovery many are banking on isn’t going to materialize.

At the start of May, the stock market got some great news: the recession is over. Economists at both Goldman Sachs and Morgan Stanley called the bottom of the U.S.’ economic decline.

But contrary to what many Donald Trump supporters and internet trolls believe, the economy isn’t the same as the stock market, though the two are somewhat intertwined.

Perhaps part of the reason the stock market is trading so out of sync with economic warnings is a lack of understanding. | Source: CCN.com

Eventually, the stock market has to reflect the overall economy. The reason it doesn’t right now is that most investors are betting on a sharp, fast recovery. So the question of whether the stock market can hold its gains depends heavily on how long we bump along this desolate bottom.

The Dow has been resilient despite worsening economic conditions. | Source: Yahoo Finance

The Stock Market Can’t Climb Until the Economy Does

Despite the reopening of economies around the world, it’s probably going to take years to get back to where we were at the start of 2020. The University of Chicago’s Becker Friedman Institute believes that many of the jobs lost in the pandemic won’t return—11.6 million of them, to be exact.

That’s mainly because of the massive shift in the global economy that coronavirus has accelerated. A good example is in retail, where brick-and-mortar department stores had already become relics from the time before e-commerce. Now, they’ve been forced to sink or swim as foot traffic has shut down completely. They’re mainly sinking.

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The U.S. economy is about to be littered with the remains of failed businesses | Image: AP Photo/Andrew Harnik, File

It’s happening in other aspects of the economy as well—businesses are restructuring, cutting jobs, changing the way they operate, and allowing employees to work from home. There’ll be less travel and, therefore, fewer pilots, cabin crew, and check-in agents. There’ll be fewer planes, and as such fewer engineers who build and maintain them. The list goes on and on. 

Leading Indicators Show More Economic Pain Ahead

The glaring evidence of this shift is evident in new trailer orders from U.S. Trucking companies. In April 2019, 15,000 new trailers were ordered. This year the order totaled just 300. 

Trailer orders are down 98%, suggesting U.S. businesses see more pain ahead. |Source: Business Insider

It would be easy to point to the fact that April was full of uncertainty, and the country-wide lockdowns impacted those numbers. But what’s important is that the data are a leading indicator—the orders aren’t for April, they’re placed in April for future use.

The sharp recovery the stock market is banking on isn’t the same one businesses around the country are planning for. 

Even Social Distancing Stocks Need the Economy

Some investors are taking comfort in “quarantine stocks.” Cornell Capital Group created its index to track the basket of stocks that will thrive in quarantine. It includes the likes of Amazon (NASDAQ:AMZN) and Zoom (NASDAQ:ZM), whose businesses are seen benefitting from social distancing measures. 

At some point, even the stocks that benefit from isolation measures are going to need the economy to pick up to continue delivering growth. | Source: Cornell Capital

But the tailwinds that quarantine offers will eventually fade as the economy’s dire situation becomes more clear. Sure, online collaboration tools like Zoom are having a moment in the sun as businesses adapt to the pandemic. Still, Zoom is no different than other companies trading on the stock market. It needs a strong economy to continue growing.

Zoom needs businesses to stay in business. Amazon needs people to spend money to support its e-commerce business. It needs other companies to invest in its cloud computing platform. Facebook (NASDAQ:FB), another supposed beneficiary of prolonged social distancing, needs other firms to spend on advertising. 

The writing is in the sand. Countless execs, including Amazon’s Jeff Bezos, have warned of the pain ahead. But still, the market keeps marching ever higher. At some point, the house of cards will topple. 

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The author holds no investment position in any of the aforementioned securities at the time of writing.

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