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Another Stock Market Crash in 2020? Here’s Why It Could Happen Lombardi Letter 2020-06-24 08:59:48 stock market crash US economy recession The U.S. economy continues to struggle, and it could struggle a lot more going forward. With this, could there be a stock market crash? Here’s what to consider. Stock Market Crash https://www.lombardiletter.com/wp-content/uploads/2020/06/Heres-Why-There-Could-Be-Another-Stock-Market-Crash-in-2020-150x150.jpg

Another Stock Market Crash in 2020? Here’s Why It Could Happen

Here's Why There Could Be Another Stock Market Crash in 2020

Will the Stock Market Crash Again in 2020? Economic Data Says It’s Possible

If you bought stocks in March, great! But don’t get too complacent now. There could be another stock market crash coming in 2020.

Remember this: the stock market is a function of the economy. This means the stock market moves as the economy moves.

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If the overall economy is expected to do well, the stock market will do well. If the overall economy is expected to put on a dire performance, we will see a stock market crash.

You see, at the moment, the economy is anything but good, and mark my words: it will be years before it gets back to normal. This makes the stock market a very fragile place for now.

Unemployment at Highest Level Since Great Depression

Here’s some evidence of how poorly the economy is actually performing.

Look at the chart below. It plots the unemployment rate in the U.S. economy since the 1950s. Please note, the gray areas on the chart represent recessions.

(Source: “Unemployment Rate,” Federal Reserve Bank of St. Louis, last accessed June 23, 2020.)

In May, the unemployment rate in the U.S. stood at 13.3%. There has never been a recession or economic slowdown since the Great Depression in the U.S. economy when the unemployment rate soared this much.

We are told that this all happened due to the  COVID-19 pandemic and that this may be temporary. Be careful with that rhetoric. Business has slowed down immensely. It’s highly possible that some Americans may never get back to their same jobs.

This Indicator Says Businesses Are Worried of a Bigger Slowdown

The unemployment rate is just one thing that says the U.S. economy is in bad shape.

Businesses are worried. This is seen by their inventories. It’s one of the best indicators of how they feel about the future. When businesses expect demand to increase (economic boom), they increase their inventories. If they expect expect demand to decrease (economic slowdown), they cut back on inventories.

Look at the chart below. It plots the year-over-year change in monthly business inventories.

(Source: “Total Business Inventories,” Federal Reserve Bank of St. Louis, accessed June 23, 2020.)

For the first time since the Great Recession of 2007 to 2009, businesses reduced their inventories for three months straight—between February and April. This shouldn’t be taken lightly. It’s pretty clear that they expect a slowdown.

Stock Market Has Done Well Since March Lows, But It’s Not Safe Anymore

Dear reader, I could go on and list a lot of other bad things happening in the U.S. economy that are making the economic outlook dire. But I will stop with the two things mentioned.

Here’s the bottom line: the economy is not good and won’t get better soon. Is the stock market safe? It’s not.

Consider this, for example: nearly 46 million Americans are currently unemployed. Chances are, they won’t be going out and buying new gadgets, homes, and other related things, as they don’t have income from work. (Source: “US Weekly Jobless Claims Hit 1.5 million, Bringing the 13-Week Total to 46 Million,” Business Insider, June 18, 2020.)

Is this good for consumer discretionary stocks? It’s not.

Also, as I write this, I am hearing a lot of noise about a possible second wave of coronavirus cases, and the data suggests it could be possible. If the second wave persists, we will see the economic picture get worse, and the odds that the stock market will crash will increase.

I reiterate what I said earlier: it’s possible that we will see another stock market crash in 2020. The current state of the U.S. economy and the economic outlook back this argument. Be careful; placing stop-losses on investment positions may not be a bad idea.

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