Will there be a major stock market correction soon and will we feel the consequences?

07/03/2020

In the United States, the corona crisis has led to a massive economic downturn. And yet the stock markets, both Wall Street and Nasdaq, are extremely optimistic. But is that optimism justified? Will there be a major stock market correction soon and will we also feel the consequences?

Can we expect a stock market crash in the United States soon? After all, the stock markets are extremely optimistic, while economic activity is still a lot lower than before the corona crisis.

There is indeed a big difference between the reality and the optimism of the stock markets. In the United States in particular, the stock markets remain optimistic, especially Nasdaq. That seems bizarre and difficult to understand. But the stock markets are simply ahead of what is to come economically. History teaches us that stock markets have predictive value. They basically reflect all information currently publicly available. There are several reasons for the rising stock market prices. Young people are now also buying more shares. And the digital revolution that is coming is making people optimistic.

That means we shouldn't fear a stock market crash?

We do not know whether the stock markets will crash. But it is a fact that many stocks are currently undervalued. Don't forget that a lot of shares fell by 100 to 150% in the middle of March this year. Now they are slowly climbing out of the valley. The flare-up has gone phenomenally fast, especially Nasdaq. Things are slowing down in Europe, because there are not so many technology stocks, but rather more traditional sectors.

Are the stock markets optimistic because we are?

Humans are creatures of habit and we don't like change. Usually we need a little push for that. The corona crisis gave us that push to accelerate the introduction of many new technological gadgets. Thanks to digital technology, we were able to work from home and maintain our contacts. Digital websites allowed shops to continue to sell their products. The turnaround to digital working came suddenly and we are now all fine with that. That may be why we are so optimistic.

In addition - and this is a very harsh reality - it is true that this health crisis has mainly affected weaker and older people. In any case, they contribute less to the productivity in a country. It is like after World War II, when an entire generation was wiped out because of military duty and fighting. But as a result, there were more opportunities for those who were left behind.

Does this mean that we will never go back to the world as it was before corona?

The question is indeed whether the world has fundamentally changed. Or will it simply become business as usual again after the crisis? International transport flourished before corona hit us. We took advantage of the many cheap products that flooded our consumer markets: that is what globalization has brought us. But we have seen the enormous risks involved. A small virus can spread all over the world in no time.

Trade with the United States and China is already declining. In order to reduce the risk of pandemics, more border controls are likely to be introduced or the borders will sometimes be closed. The result: there will be fewer cheap products available, making the goods scarcer and more expensive. Local production is simply more expensive.

In other words, will we have to give up part of our prosperity?

Most probably. Not only will less cheap products and services from abroad be imported, but our income will also be lower than before the corona crisis. The question is whether we will be willing to sacrifice part of our prosperity through a different way of living and working. Are we ready for a slower world where less cheap products come from abroad? Perhaps, if we replace it with more well-being - a higher quality of life - that could very well be the case. That would mean less material prosperity but perhaps more attention to family, friends, climate and health.

So, best advice? 

Start building a "wish list" of issues that you would like to invest in or add to in your portfolio. You always want to buy low and sell high, right? Well, in the coming weeks and months, you will still have the opportunity to watch some of these go on sale. So get ready!

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