Despite the fact that many saw it coming, the stock market crash of March 2020 took an enormous toll on global economies. Most G20 countries saw an economic downturn of 30 percent as a result of the global shutdown and widespread panic caused by the global health crisis.
Although the stock market has been slowly rising back up over the past couple of weeks, many fear that we haven’t seen the last of its impact on Wall Street. While it’s possible that the situation could continue improving, it’s also not unlikely that we’re due for another crash soon. Another shock may well be coming, as millions of people and businesses fall behind on obligations such as mortgages and corporate loans. Here are 10 reasons why this could happen.
1. A second wave of illness
Regardless of where you stand, the current lack of vaccine means there’s is at least a chance of countries being hit with a second wave of illness. Health officials and organizations around the world are warning of an impending “second wave,” i.e. a repeated increase in the numbers of new instances of infection. Estimates on when this might happen vary from the holiday season to early autumn. As many countries are beginning to lift restrictions and re-open businesses and public spaces, this might happen sooner rather than later.
2. Stimulus packages are temporary
In the U.S. and many other countries, governments have provided stimulus packages for businesses and additional unemployment benefits for individuals. This cash injection might be partly responsible for the slight recovery of the stock market that we’ve seen in recent weeks. However, this was a temporary boost – once this money runs out, businesses and individuals will struggle again to pay mortgages, rent and will limit their spending, possibly leading to another rapid drop in stocks.
3. Irreversible damage to small businesses
Despite government help, many small businesses are struggling to keep afloat – and many others have already been forced to cut down on staffing or close down entirely. A continued decrease in small business activity will cause unemployment levels to remain elevated, negatively impacting the economy.
4. Unemployment will continue for longer than the crisis itself
Even once the threat has passed, we can’t realistically expect everything to go back to the way it was before this hit. Even in an optimistic scenario, it will take months for businesses to return to full capacity – and for new companies to take the place of those that didn’t survive. Unemployment is at a record high in the U.S. and many other countries, and this will continue to put a strain on the economy.
5. Mortgage defaults
So far, many lenders have been making allowances for late payments. But no bank can afford to keep delaying its income forever. Combined with the unemployment rate and the aforementioned temporary nature of government financial aid, it won’t be long before mortgage and lending defaults deliver another hit to the stock market.
6. Unreliable earnings per share estimates
Earnings per share (EPS) estimates are the primary tool for investors to determine the potential success of a company. Without accurate EPS, it’s impossible to reliably estimate whether its best to sell, buy or hold a particular stock. Experts warn that current EPS estimates are not reflective of the real value of stocks, with as much as half of all EPS estimates taking the economic impact of the crisis into account. In effect, many stocks appear cheaper than they actually are, leading to potentially catastrophic decisions on investors’ part.
7. Reduction in stock buybacks
Stock buybacks, or share repurchases, essentially allow companies to re-invest money into themselves. In the process, the company absorbs the repurchased shares, reducing the number of outstanding shares on the market. Regardless of how debatable the ethics of stock buybacks might be, they do make up a large proportion of corporate stock market gains. Or rather, they did – until the downturn forced companies to cut back on their buyback programs.
8. Looming recession
In terms of how this crisis has affected the global economy, most people agree that things will have to get worse before they can start to get better. Experts are expecting the U.S. to have to face a post-crash recession, with little hope of the Federal Reserve bailing Wall Street out this time.
9. Continued fear and uncertainty
It’s important to keep in mind that often-overlooked influences like panic and fear can fuel an economic downturn as effectively as any other factors. With the public health emergency still a largely unknown entity to healthcare professionals and the public alike, it’s difficult to make informed decisions about anything – including investing. Uncertainty leads to erratic decisions and inaction, which can cause economic damage and stagnation, respectively.
The situation has highlighted many imperfections in our socio-economic realities, including the questionable reliability of many of our news outlets. With different media platforms often providing contradictory or downright incorrect information and advice, it’s difficult to know which source to trust. This fuels the aforementioned sense of uncertainty, effectively paralyzing many decision-makers.
By: Oliver Isaacs