The stock market has recovered in recent days. the S & P / TSX Composite Index is up 24% since March 23. This is technically called a “bull market”. So are we, in fact, in another long-term rally? Is the historic stock market crash of 2020 over?
Here is a closer look.
Although the stock market appears to have recovered, the economy has not. The vast majority of the world’s population is currently in pre-trial detention. All aspects of the world economy, except essential services, have been cut off. It is unprecedented.
Although the economy is on hold, financial conditions are not. Mortgage interest continues to pile up, utility bills have yet to be paid, and families have to put food on the table. Many businesses and families have lost income, but the expenses remain the same.
These problems are not reflected in the stock market. However, they are reflected in other data. Unemployment in Canada hit a record high this month. Half a million people asked for a mortgage delay. Almost one million people have applied to benefit from Canada’s Emergency Relief Services program (CERB).
As the closure continues, perhaps for months, these numbers may increase. Economic damage of this magnitude could take years to emerge. This grim scenario is not reflected on the stock market.
The Canadian stock market is currently worth $ 2.3 trillion. This represents 98.2% of the country’s gross domestic product. Typically, a stock market to GDP ratio of less than 100% represents an understatement. However, in 2020, Canada’s GDP is expected to decline significantly.
The big banks expect Canada’s GDP to decrease by 20% in 2020. This forecast could be wrong, but it indicates the historical nature of this current disaster. If GDP drops by two digits, the stock market still seems overvalued.
In short, the stock market crash could be far from over. Investors may want to wait for a larger drop.
Another reason why I think we haven’t seen the stock market crash isn’t over yet is the absolute silence of smart money. Warren Buffett sold his airline shares, but he didn’t purchased something substantial. Given that it has a $ 128 billion war chest, it obviously awaits better appraisals.
Likewise, the major asset managers and private equity firms have not made great strides. No one rushes to buy iconic distressed properties or cruise lines. There are no signs of multi-billion dollar mergers or acquisitions. Ray Dalio or David Tepper have not yet spoken either.
Smart money movements are usually an indicator of the direction of the market. When you see the Norwegian sovereign wealth fund or the Ontario Municipal Employees Retirement System (OMERS) buying assets, it’s a green flag. For the moment, there is no sign of green flags.
In the past two months, the stock market has gone from simple terror to absolute optimism. Investors seem to believe that the pandemic will soon be over. The way the stock market has recovered, investors seem to be betting on a “V-shaped” economic recovery.
I think the rally is overkill. Valuations are still too high. Cautious investors should probably wait a little longer.
Canadian stocks to buy cheaply during the stock market crash
Many investors fear a market collapse. However, long-term investors should accept this crash, as bear markets can potentially save you millions. So if you’re tired of reading that other people are getting rich in the stock market, this could be a good day for you.
Because Motley Fool Canada offers a full 65% discount on the list price for its best stock selection service, plus a full membership refund guarantee on what you pay for the service. Just click here to find out how you can benefit.
Learn more today!