The Stock Market Is On The Edge Of A Historic Crash
Stocks are selling off again. This week, the S&P 500 has taken the deepest dive since June, dropping 5.5%.
As I’ll show, there are five forces weighing down stocks. And all you need to know is summed up in five simple charts.
The historic crash of Europe’s technology giant spooked investors
Have you heard about SAP SAP ? This past Monday, Europe’s largest tech stock crashed a pitiful 23%—wiping out $33 billion in investors’ money.
SAP caught investors off guard by reporting a surprise drop in sales. The software giant also slashed its business outlook for the full year—expecting lockdowns to hurt sales through the first half of 2021.
But wait, shouldn’t tech stocks do well during Covid?
Turns out, businesses are putting off major investments in software during Covid. And now investors are afraid that tech stocks (especially in enterprise software) might not be as immune to Covid as previously thought.
SAP’s American peers Salesforce CRM , Oracle ORCL , IBM IBM , Microsoft MSFT , and Adobe ADBE plunged 4%, 7%, 8%, 5% and 5.5% on the news. And a broader basket of software stocks (IGV) IGV dropped 4.5%:
Pfizer’s silence suggests delays in a Covid vaccine
Pfizer appears to be leading the Covid vaccine race, and Wall Street has been largely banking on its success.
Last month, America’s drug giant hinted that it might have a safe and working vaccine by the end of October. But the month is coming to an end, and this past Tuesday Pfizer said it didn’t have any update yet.
Pfizer’s silence is raising red flags: “Some investors have begun to ponder if this delay means the first interim analysis has missed, and, if so, what this means for the likely efficacy of the vaccine,” American’s mutual fund giant Bernstein said in a note to clients.
At the same time, two other late-stage vaccines have been put on pause due to “unexplained illnesses.” Which could add to the growing public distrust in the vaccine. As I wrote in Meanwhile in Markets last month:
People won’t rush to shoot up. A recent Axios poll found that more than 65% of Americans aren’t willing to get Covid shots. And the ranks of Covid “anti-vaxxers” are growing by the day, as you can see:
All this suggests that social distancing will be around for longer than we might think. In the meantime, “the curve” keeps edging higher.
Covid is set to spread exponentially
After taking a breather in August and September, Covid cases blew up to a fresh all-time high.
Last Friday, a record 85,000 daily cases were reported in the U.S. That’s 2.5X more than the Covid peak during the Spring wave—and up 10,000 from the previous record in July.
And yet, scientists say the worst is still ahead.
“I think we are right now at the cusp of what is going to be exponential spread in parts of the country,” former Food and Drug Administration Commissioner Dr. Scott Gottlieb told CNBC on Monday.
Meanwhile, major countries overseas are going into lockdowns again. This is raising concerns over a “freeze” of the global economy in the coming months.
Stimulus-driven recovery hangs in the air
It’s been three months now, and Capitol Hill is still deadlocked over the next stimulus deal. Last in the drawn-out saga was Monday’s stalled talks between House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin.
There’s a lot at stake here. While the U.S. grapples with the worst unemployment since the 1930s (factor in “misclassification” errors), stimulus benefits have kept most Americans afloat.
A NBER study showed that two-thirds of unemployed Americans were getting benefits greater than their lost earnings. And as I’ve talked about before, stimulus boosted Americans’ income to record levels:
The result: Over the summer, spending rebounded to pre-Covid levels. But most financial assistance programs are expiring. And Wall Street frets that people will have to tighten their belts to the last notch.
No wonder Investors’ paranoia is growing
Take a look at the U.S. Crash Confidence Index constructed by Nobel-winning economist Robert Shiller. The lower the reading, the bigger the share of investors who think we may be headed for a catastrophic crash like 1987’s Black Monday.
As you can see, individual investors have not been this paranoid since 1994. Big money isn’t kicking back either. Fear levels on Wall Street are marching closer and closer to the paranoia of the 2008 housing boom.
Shiller thinks that this combo of low confidence and record-high stock prices could be a recipe for disaster. “Given the general lack of investor confidence amid a pandemic and political polarization, there is a chance that a negative, self-fulfilling prophecy will flourish,” he wrote in a recent New York Times NYT op-ed.
Stay ahead with “big picture” insights you won’t find elsewhere
Every week, I put out a story that explains what’s driving the markets. Subscribe here to get my analysis and stock picks in your inbox.