Are We Are Headed for a Stock Market Crash?

The coronavirus pandemic continues to rage across the globe. No one knows how it will impact the economy; not today, not over the next few months, not even over the longer term. The only thing that is known is the ever-increasing number of new COVID-19 cases. The numbers today are almost twice those when the virus peaked in April.

Some areas are going hard lockdown, while others are hoping social distancing will be sufficient. At the moment, it is every state for itself in the US, for instance, a condition that makes it very difficult for business and commerce. Businesses such as the travel industry, entertainment, and retail stores are all facing problems.

Yet, despite all the bad news, the stock market has shown a defiant spirit. Sooner or later, this is likely to change, but a market crash will not be the disaster some believe it will be.

Bear Markets do Happen

During February and March, the market crashed and crashed hard. However, due to optimism that the economy will bounce back, the market has largely recovered. Despite the fact the coronavirus is worse than ever, the upbeat outlook for the market persists.

With businesses across the country closing, there is an increased risk that the market will change direction. However, COVID-19 may not be the fuse that sets off the next bear market The trigger may very well be the federal government letting unemployment benefits expire.

As it stands, those collecting unemployment benefits are receiving an additional $600 per week, over-and-above the benefits they would normally be entitled to.

The additional benefits are currently scheduled to expire by the end of July, and Republicans in the Senate do not appear to be inclined to extend them. Once this happens, many millions of Americans will see a sharp drop in income. Many people will be unable to pay their bills, a fact that will ripple through the retail industry, leading more businesses to fail and more people put out of work. Any business that relies on consumer spending will feel the adverse effects.

While the number of unemployed has dropped, the trend may reverse, getting worse before getting better again. Should the federal government take away the added $600 a week, the action may very well set off a domino effect that leads to a stock market crash.

Stay Calm

The market rebound was quick, likely due to the unique circumstances that triggered the fall in the first place.

In the past, the stock market has taken longer to recover from large drops. Eventually, the market rebounded to hit new highs. If the market does crash due to the economic impact of the strengthening epidemic, there is no way to accurately predict what will happen.

The discovery of effective treatment, or perhaps the success of one of the many vaccines that are under development may be the stimulus needed to reverse market sentiment. Conversely, a lack of success in developing a vaccine may keep stock prices depressed for longer than anticipated.

What is known is the historic pattern of the stock market in the U.S. Busts are eventually followed by booms. Even though this is true, it may not be comforting knowing this while a crash is happening. It is, however, something to keep in the back of your mind.

During a stock market crash is the perfect opportunity to re-evaluate the companies in your portfolio. If you have no reason to doubt your original investment thesis, there could not be a better time to add to your positions. If there does not to be any apparent change in the company over the long run, and you expect a recovery and price rebound, you may wish to hold. These are unique times, do not let the fear of short-term price drops cause you to doubt your long-term investment philosophy.