Will The Stock Market Crash Again In 2020?
Today in this blog we are going to see if the stock market is going to crash or if it is a rumor. And if you are a new visitor to our website, I can tell you in full details what is stock market and how does stock market works. If you want to understand what the stock market is, click on the link given there.
Last week has been pretty rough for the stock market. When everyone thought that these stocks are going to grow forever, Major tech stocks completely collapsed and experienced a drop day after day. Apple, Google, Tesla, every tech stock is pretty much down. And that’s not by accident. The stock market has been overvalued for the last few months since the stock market has been rising like there is no tomorrow.
And when the market is at its peak! What do you do! Sell! And that’s what has been happening recently. At the beginning of August, Bezos first sold over 3.1 billion dollars of amazon stocks. At the end of August, Tim Cook sold 131.7million dollars of apple stocks since it probably won’t cross the 2 trillion dollar mark at least in the coming year or two. On September 1st, Tesla announced that it would raise 5 billion dollars by selling stocks from time to time, but it seems like that time wasn’t long.
By September 4th, within three days, they sold off everything and raised 5 billion dollars. It seems like Musk also thinks that the price was at all times high. And that’s one reason why the market has been falling. The demand and supply usually set the price. Since the beginning of the pandemic, there has been a lot of uncertainty about the future, but what we knew for sure that we need to practice social distancing, and a lot of jobs are going to be from home.
Automation is going to accelerate, in other words, technology is basically the future so investors had to keep their wealth somewhere safe and most important somewhere where it would continue to grow despite the pandemic and tech companies seemed like the best option besides gold. That’s why gold prices and tech companies grew exponentially since there was much more cash chasing a limited amount of stocks.
Hence, prices rose dramatically. Once early investors realized that prices are significantly overvalued, they decided to sell and rip off the profits as would any rational investor. And one of the problems with the market is that most investors are not rational. In the past, you had to study finance, understand financial statements, and make reasonable financial decisions, today, you can buy stocks with a few clicks on your smartphone, so If you are seeing in the news that apple, Tesla, or amazon stocks are growing dramatically!
Why not take the ride with them and also get rich quickly! And when the market starts falling, people panic and start selling to minimize losses, which drives prices down. why stocks are overvalued Take Apple, for example. Just in December of last year, its price to earnings ratio was 17.7, which means for every dollar you invest, it will take the company17.7 years to pay back the amount you paid for each share.
Since the industry average is 15, apple was quite a good investment back then. But then suddenly, in less than a year, it’s ratio jumps to almost 40 when its earnings were pretty much the same as the last year. Of course, price to earnings ratio isn’t the most accurate way to value a company since it uses the company’s earnings for the last12 months. So let’s take a look at the forward P/E ratio. How many experts predict the company is going to earn. Last year it was a little over 22.17.
Since its price to earnings ratio has more than doubled, its forward PE ratio should have as well? Right? Not at all. It jumped slightly to 28 as of September 2020. Which is another indicator that the stock price is probably overvalued? That’s why it has fallen to 34 at the time of writing this script and would probably keep falling to around 20. Of course, relying on some ratios to judge the market isn’t the most accurate method, but it’s not just apple, but also Tesla, amazon, google, and others.
However, not the entire market is overvalued. Many companies haven’t recovered to their-pandemic levels yet. It’s only the tech companies that surged dramatically. So, The question is will the market crash again? The United States handled COVID-19 terribly. Cases might have dropped to 30 or 40 thousand a day, but that’s still significantly high. And as we approach the winter, experts are warning that cases might spike again. On top of that, take into account that the election is coming, you have a perfect recipe for another market crash. Elections create uncertainty.
Which means investors don’t know what’s going to happen. Regardless of which candidate do you support, we have to put the facts on the table. If trump gets elected, we will have massive protests, which will also increase COVID 19 cases, and will create more uncertainty. And if Biden gets elected, then corporate taxes or even capital gain taxes would probably spike, which means fewer earnings for companies and investors, which means stock prices would drop.
But that doesn’t mean that the market will crash as it did back in March. Only time will tell. But what we know for sure is that the Fed is going to do everything possible to keep the economy stable because that’s the job of the fed. If the economy is rising too fast, it raises interest rates, for example, to slow it down. When the market is falling dramatically, then the fed steps in to flood the market with cash to make the crises a little less painful. And that’s what happened back in March.
The fed lowered interest to almost zero, issued stimulus checks, started buying corporate debt. It basically used every weapon in its arsenal to prevent the economy sliding into a recession, the economy still went into recession, but the stock market grew exponentially since the Fed made it clear that it’s going to do everything to keep it stable.
However, that can’t continue. At some point, investors are going to realize that prices are inflated, and the bubble would burst. The Fed is trying to keep the economy stable until a vaccine is available so that everyone will get back to work, and the economy keeps growing as it has been prior to that. According to Bill Gates, who has long ago predicted this pandemic and heavily invested in the top 6 companies working on a vaccine, a vaccine for COVID 19 will most likely be ready by the beginning of 2021, so we are pretty close to it.
To what extend the market is going to crash in the next few months. No one really knows. But the main question is, should you sell or hold? If you are a long term investor, you probably shouldn’t care about what’s happening in the market because the market is always volatile. It just sometimes its a bit more than other times. If you are an ETF investor, you probably know that.
Because of these ETFs have just recently recovered to their pre-pandemic levels. As the election is going to create uncertainty, the market might dip a little bit, maybe more, but at the end of the day, it will bounce back to what it really worth.
For the last ten years, the market has been growing tremendously, and the Fed did a pretty good job of keeping it growing. It was the longest economic expansion in the history of the US. I personally won’t be selling anything because I am a long term investor,
especially the investments I have made this year because I will have to pay a high capital gain tax, So I would rather just keep my investments. But at the same time, I probably won’t go heavy on any stock until after the election if stocks bounce back to what they really worth.
Then I am all in. If not, waiting for a little more would probably be a wiser option. And now it’s your turn to tell me if you are investing now or not? Do you agree with me that we are in a bubble? And which stock are you going to buy when the bubble bursts?
Let me know int he comments below.