10 reasons why the stock market is likely to collapse again

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10 reasons why the stock market is likely to collapse again
10 reasons why the stock market is likely to collapse again

Despite the fact that many saw it coming, the stock market crash in March 2020 had a huge impact on the global economy. Most G20 countries have experience an economic recession of 30% as a result of the global shutdown and widespread panic caused by the global health crisis.

Although the stock market has been slowly increasing in recent weeks, many fear that we have not seen the recent impact on Wall Street. While the situation may continue to improve, we are unlikely to collapse again soon. Another shock is likely to occur as millions of people and businesses default on commitments such as mortgages and corporate loans. Here are 10 reasons why this could happen.

1. A second wave of illness

Regardless of where you are, the current lack of vaccine means that there is at least one possibility that countries are affected by a second wave of diseases. Health officials and organizations around the world are warning of an upcoming “second wave”, that is, a repeated increase in new infections. Estimates of when this could happen range from the holiday season to early autumn. With many countries beginning to lift restrictions and reopening businesses and public spaces, this could happen sooner rather than later.

2. Stimulus packets are temporary

In the United States and many other countries, governments have provided business stimulus packages and additional unemployment benefits to people. This cash inflow could be partly responsible for the slight stock market recovery we’ve seen in recent weeks. However, this has been a temporary upswing: once this money is used up, businesses and individuals will again have problems paying mortgages, renting and capping spending, which may lead to a further rapid decline in inventories.

3. Irreversible damage to small businesses

Despite government aid, many small businesses are struggling to stay afloat, and many others have been forced to scale down or close entirely. A sustained decline in small business activity will keep unemployment high and negatively impact the economy.

4. Unemployment will last longer than the crisis itself

Even if the threat is over, we cannot realistically expect everything to go back to what it was before this coup. Even in an optimistic scenario, it will take months for companies to reach full capacity and new companies to replace those who have not survived. Unemployment is at record levels in the United States and many other countries, which will continue to put pressure on the economy.

5. Mortgage defaults

So far, many lenders have considered late payments. But no bank can afford to delay their earnings forever. Combined with the unemployment rate and the temporary nature of government funding mentioned above, it won’t be long before the mortgage and loan defaults come back on the stock market.

6. Unreliable earnings per share estimates

Earnings per share (EPS) estimates are the primary tool for investors to determine a company’s potential success. Without an accurate EPS, it is impossible to reliably assess whether it is better to sell, buy, or hold a particular stock. Experts warn that current EPS estimates do not reflect the actual value of the shares, as up to half of all EPS estimates take into account the economic impact of the crisis. Indeed, many stocks seem to be cheaper than they actually are, leading to potentially catastrophic investor decisions.

7. Reduction of share buybacks

Share buybacks or share buybacks essentially allow companies to reinvest money in themselves. The company takes up the repurchased shares and thus reduces the number of shares outstanding on the market. Regardless of how controversial the ethics of share buybacks are, they make up a large part of corporate stock market profits. Or rather, until the recession forced companies to reduce their buyback programs.

8. upcoming recession

Regarding the impact of this crisis on the global economy, most people agree that the situation must deteriorate before it can improve. Experts predict that the US will face a recession after the crash, with little hope that the Federal Reserve will save Wall Street this time.

9. Continuous fear and insecurity

It is important to note that often overlooked influences like panic and fear can fuel an economic recession as effectively as any other factor. Because the public health emergency is still an unknown entity for health professionals and the general public, it is difficult to make informed decisions about anything, including investments. Uncertainty leads to unpredictable decisions and inaction that can cause economic damage or stagnation.

10. Disinformation

The situation has exposed many imperfections in our socio-economic reality, including the questionable reliability of many of our media. With various media platforms that often provide contradictory or frankly incorrect information and advice, it is difficult to know which source to trust. This fuels the feeling of insecurity mentioned above and effectively paralyzes many decision-makers.

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