- Economists believe that a best-case scenario sees the global economy recovering in two to three years.
- Fund managers are largely staying on the sidelines.
- A lack of commitment in this rally could be disastrous if it reverses.
More and more, it’s looking like the U.S. stock market is headed for a crash.
Over the past few weeks, the Dow Jones Industrial Average and the S&P 500 have been unstoppable in the face of dire economic data. The Fed’s commitment to propping up financial markets has bolstered investor confidence and pushed equities ever higher.
But all of that is bound to come crashing down, according to some of the biggest fund managers on the planet.
Smart Money Anticipates Stock Market Crash
Bank of America surveyed fund managers around the globe and found that over two-thirds believe we’re in a bear-market rally.
That means they think the increase we’ve seen over the past few weeks won’t last – and that stocks will eventually resume their downward trajectory.
Fund managers surveyed were more bearish than bullish on the trajectory of the stock market. | Source: Bank of America via MarketWatch
Their fund allocations tell a similar story, with cash levels sitting at a greater-than-usual 5.7% in May.
Even more telling, the amount of money parked in bonds ballooned to its highest level in a decade.
It’ll Take the Economy 3 Years to Recover
The coronavirus pandemic has created downward pressure on the global economy that will be difficult to shake. | Source: Kena Betancur / AFP
Fund managers aren’t alone in their gloomy outlook.
A new IHS Markit report predicts it could take three years for the global economy to recover from the coronavirus shock. In 2020 alone, the firm is expecting global GDP to fall by 5.5%.
What’s more, the IHS economists warned that these predictions are a best-case scenario. They assume the virus doesn’t reemerge in winter.
Given the unrelentingly bad news and data on the coronavirus disease…and the economic carnage, there is high likelihood that the near-term outlook will get worse before it gets better.
The report concluded that although growth may initially improve amid easing lockdown restrictions, that trend is unlikely to continue.
While growth in the hardest-hit economies may snap back briefly, the momentum will soon fade.
Investors Are Behaving Irrationally
Despite calls for caution and mounting evidence that a V-shaped recovery is a near impossibility, investors are continuously driving the U.S. stock market higher.
The rise has been attributed to optimism regarding a vaccine and the reopening of state economies. But an analysis by Cornell Capital Group exposes just how irrational this behavior is.
Cornell created the “Quarantine Index,” which tracks a basket of stocks that benefit from stay-at-home orders. It includes the likes of Amazon (NASDAQ:AMZN) and Zoom (NASDAQ:ZM), whose businesses thrive when people are confined to their homes.
By contrast, Cornell also created the “Anti-Quarantine Index,” a group of stocks including airlines and hotels that have been hurt by social distancing.
The Quarantine Index is a telling sign of where the market sees the economy heading in the future. |Source: Cornell Capital Group
If an economic recovery is on the horizon, you’d expect to see the Quarantine Index start to come down and the Anti-Quarantine Index rise. But the reverse is true.
Despite the supposed optimism for a speedy recovery, the Quarantine Index continues to outperform the market. Meanwhile, the Anti-Quarantine Index is lagging.
Lack of Real Conviction Could Sink the Stock Market
If “FOMO” is driving the recovery, then any near-term correction could quickly spiral into something much more serious. | Source: Yahoo Finance
What does that say about the stock market? For one, it suggests there’s still a lot of uncertainty floating around.
As the stock market ticks higher, investors are jumping in because they’re afraid to miss out. But the rising tide of investors lacking genuine conviction could set the market up for a bigger fall.
If we do see the 8%-10% correction that Bank of America’s Jason Woodard has predicted, it could turn into something larger when the swelling number of skittish traders start to panic.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.
This article was edited by Josiah Wilmoth.