GMR 167: Are We Headed for a Market Crash

To be an effective investor, you need to understand how the economy affects different markets. In this episode of GMR, we revisit some of the concerns we discussed back in September of 2020 due to the pandemic and economic stimulus the government has provided. The question we should all be asking and preparing for is, are we headed for a market crash, or will we see continued economic growth?

Show Notes

What’s Ahead

We need to establish one important fact: No one can accurately predict whether or not the stock market will crash in 2021. Just think back to everything that happened last year—you can’t make this stuff up!

Since emotion is the primary driver of very short-term price movements, we're never going to know precisely when a crash or correction is coming. But make no mistake about it, crashes and corrections are an inevitable part of the investing cycle, and some would say the price of admission to the greatest wealth-creating tool on the planet. (TheMotlelyFool.com)

Previous Crashes - 20% in a short time frame

• The Great Depression (1929): Over the course of a few days, the DJIA dropped 24.8%. It took a little over a decade for the economy to get back to pre-depression levels. Industry from World War II helped get things back up and running.

• The Stock Market Crash of 1987: The market lost 22.6% of its value in one day, known as Black Monday, But within two years, it had recovered everything it had lost.

• September 11, 2001: Terrorist attacks in our country caused a major nosedive in the market, but it corrected itself quickly. Just two months later, the stock market had returned to September 10 levels.

• The Great Recession of 2008: The DJIA lost about 50% of its value in a very short time. However, after a couple of years, the market was stronger than ever before—we were essentially in a bull market (a period of significant economic growth) from 2009 to just before the coronavirus crash.

• The Coronavirus Crash: In March of 2020, the COVID-19 pandemic triggered the most rapid global crash in financial history. However, the stock market regained ground relatively quickly, and the year closed with record highs in all major indexes.

Things to be concerned about

• Fed activities

  • Reduced the interest rate by 1.5% to a range of 0.00% -0.25%

  • Promised to keep interest rates low - “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment, and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”

  • Bought billions in securities (equity, debt, and hybrids) - “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions.” 

  • Propping up the housing and commercial market

    • The Federal Reserve stepped in with a broad array of actions to limit the economic damage from the pandemic, including up to $2.3 trillion in lending to support households, employers, financial markets, and state and local governments. “We are deploying these lending powers to an unprecedented extent [and] … will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery,”

      • Direct lending to banks at a discount of 2% (.25%) and extending the payback from being due the next day to 90 days.

      • Direct lending to major corporate employers up to 750 billion.

      • Supporting loans to small and mid-size businesses, as well as non-profits.
        Direct lending to state and municipal governments

• Housing market stats

  • 2.6 million households in forbearance - 4.3 million asked for it at the beginning of the pandemic.

    • 3.5 million that are 30 days delinquent.

    • 2.2 million 90 days or seriously delinquent.

  • 6  month supply is about right (balanced market according to the national association of realtors)

  • The current supply is around 2 months (about 1 million listings) - the reason for higher prices and multiple offers in many markets.

  • 6 months is thought to be about 2.2 million listings, which will stabilize the housing market, including homes' prices.

  • 1 million homeowners are coming to the end of their forbearance period by the end of April, with more to follow in the next few months. 

    • How many of the delinquent people and those in forbearance will list their homes, so they don’t lose their equity?

    • Some predict that by the end of 2021, at least half of the 3.5 million will default or be in danger of defaulting.

    • This increase in listings will cause the market to slow and may even cause a mild crash.

• Job Market

  • Unemployment is still almost double at 6.2% than in February 2020. 

  • Online retail jobs are up, but the service industry (restaurant and travel) is down. 

  • Fewer jobs, and less pay, with a likelihood that it will drop further once the FED stimulus is reduced.

Resources

Budgeting tools and other free resources - https://leosabo.com/resources
David’s website - www.stewardshippastors.com