The year 2020 has been one of the most challenging years in recent history due to the world-wide pandemic that has affected millions of people, the economy, and global stock markets. The stock market crash that occurred in March 2020, in response to the COVID-19 pandemic, sent shockwaves around the world. The damage was severe, but the markets recovered quickly, fueled by a surge in the technology sector. However, many experts are now questioning whether another downfall is imminent, with many red flags jumping off the various charts.
Recession Imminence
The stock market crash of March 2020 sent the financial system into a frenzy, and many experts believed that the economy would take years to recover. However, an unprecedented level of government stimulus created optimism among investors, and the stock market soared. Despite the ongoing pandemic, many investors believed that the worst was over and that things would return to normal soon.
But as the months passed, many red flags appeared, indicating that another recession may be imminent. One of the most important red flags is the rising level of debt. The United States has been running a huge budget deficit for decades, and the pandemic has only made things worse. There is now an alarming level of national debt, and despite the stimulus packages issued to ease the economic impact of the pandemic, it’s hard to understand how these debts will be paid down. Essentially, a good chunk of this debt has already been monetized – funding government spending by printing more money – a strategy that is not sustainable in the long-term.
Slow Employment Growth
Another red flag is the slow employment growth. Despite a massive drop in unemployment figures since the high peaks recorded in April, there are millions of people still unemployed, and new job creation has slowed considerably. The indicators showed a certain level of recovery in May, with unemployment falling to 13.3%, however, the numbers fell much slower than experts had initially forecasted. The recent spikes in COVID-19 cases may impact further progress in employment, which could exacerbate poor consumer spending, putting a damper on economic growth.
Economic Difficulties
Additionally, economic indicators are showing increasing levels of uncertainty. Corporate earnings are dropping, and it’s hard to ignore the hit that companies, airlines, hotels, and restaurants, in particular, have undergone due to the ongoing pandemic. Small businesses may be reticent to invest or start up new endeavors, combined with the reduced number of consumers venturing out to spend their money on nonessential goods, all hits economic growth badly. The recovering Chinese economy, which is a good indicator of global trade and production, continued its growth in Q2 2020, but it still has not reached pre-pandemic levels.
Interest Rates
The Federal Reserve has also played a part in establishing the primary red flags. Interest rates are already at or near zero, limiting the government’s options for stimulating the economy further. The federal funds rate is now down to 0%, meaning that the central bank’s traditional tool of bringing rates down during a recession is now inefficient. Other economic indicators, such as consumer spending and manufacturing, have already posted worrying numbers, indicating a wider economic slowdown.
Global Changes and Events
Finally, unforeseeable global events are always in play. They can alter the landscape of the markets at any time. Geopolitical conflict, natural disasters, oil spikes, and pandemics can all negatively impact the global economy. Shortly before the outbreak of COVID-19, trade tensions between the US and China resulted in a period of market instability, a mirror to future events that may occur to dampen the global outlook for investors. The COVID-19 pandemic has already impacted various industries, and it’s still not over yet. Anything could happen now, ranging from a second wave of COVID-19 to natural disasters such as hurricanes or wildfires or conflicts with other nations.
So, what does this all mean for investors? It means that they should remain cautious and keep a keen eye on the markets, so they can react quickly if anything untoward arises. It is also an excellent time to assess a portfolio and reduce risk levels by investing in more stable stocks that can weather the storm. Smaller-cap stocks, which are volatile in nature, come without a guarantee, and at the lightest touch of a negative downturn, can suffer significantly. It’s also important to invest in stocks based on the company’s fundamentals, focusing on businesses with a solid revenue stream and reducing exposure to riskier startups.
Conclusion
There are red flags popping up across the board, indicating that another downfall may be forthcoming. The global recovery from the pandemic has been slower than expected, and the stock market, in general, is hovering at an all-time high despite the underlying concerns. As investors, we should remain vigilant and cognizant of the global economic situation. We should be ready for the next wave of uncertainty and be prepared to protect our assets, maintaining a diversified portfolio that can withstand unexpected market volatility. It’s never too early to prepare for the worst and hope for the best.