01 Jul 2020
Why has July 31st/August 1st been ear-marked for a record stock market crash?
First, there are several factors to take into consideration, factors which could coincide to hit the economy and stock market at the same time. Many of the emergency economic measures that were put in place to support the American people throughout the pandemic, are soon to disappear by a Government withdrawal of those measures all at the same time. And that could mean trouble is on the horizon. This period has been described by economists as the ‘deepest economic downturn since the 1930’s.’ It is not an over-statement either when you look at the data. 44 million Americans have lost their jobs and more than 100,000 businesses closed permanently in the past few months. The FED Government stepped in and anaesthetised the pain, temporarily – but as the anesthetic begins to wear off, the reality is that pain is going to be felt.
So, let’s get specific! Which emergency measures are about to be cut off… and when?
A mass homeless crisis was temporarily averted, as eviction was banned in most states of America. Student loan payments were placed on hold and banks were ordered to give their customers a six-month break on mortgage payments. On top of this - counterintuitively, household incomes saw the largest monthly increase ever recorded in April due to billions in lost wages, replaced by trillions in Government spending due to issuing more than 170 million stimulus cheques.
January 2020 saw a modest 0.6% rise from the previous month. February 0.5% rise, and March saw a 2.2% loss, as fear began to settle into the economy. Then along came April with a huge 10.5%.
This is interesting, because also in April, another record was broken.
Consumer spending plunged by 13.6% from the previous month, the sharpest drop in more than six decades worth of data.
And as we know already, the economy does not function if people are not spending. It is a two-edged sword when we look at it because saving is something we should be doing regularly anyway – but people still need to spend. Spending is the oil that keeps the economic mechanics maintained for the machine to do what it must do. Businesses, communities and economies need a constant and consistent replenishing of oil, otherwise the cogs rust and the machine breaks down. One will cause growth, the other… shrinkage followed by decline.
In April we witnessed an unusual dynamic. Incomes rose yet spending dropped. And on July 31st all of that is going to change and 20 Million unemployment payments are scheduled to end. It seems that President Donald Trump and Congress have given no indication or intention of extending that date. In addition, it looks a similar prospect for direct cheques from the Government to also cease, even if another ‘stimulus bill’ is passed. However, that is still debatable, as other sources claim that Congress has yet to set a date to vote on a second and final stimulus package. And as the narrative is constantly changing on this subject, we can safely say this could all change again on the flip of a coin.
Evictions will be returning at this time also. A federal law that bans evictions in any properties that are financed by federally backed mortgages (which is more than a quarter of all American households), expires on July 25th… one week before the main economic lifeline is pulled away from millions of people and other bills also become due.
On a side note - A fascinating and surprising piece of data came from a study conducted on those who had received a stimulus cheque. The study showed that those who earned between 35-50k had invested in the stock market, and it was the third most common use of their money in this pay bracket. This pay bracket also counts for the majority of those receiving stimulus cheques. To those earning 50-75k and 100-150k per year, it was the second highest use of their money below household bills. For those earning over 250k per year – it was the 7th most popular use for their money – with loans, travel, insurance and entertainment ranking higher on the list.
This data shows that the average to middle, plus the mid/higher-range earners were taking investing in their future seriously. And this group continued to do so, even with the pressure of not knowing what the future held for them at that point. Proving that investors continue to invest, regardless.
There’s an old saying… ‘even a broken clock is correct twice.’ Predictions are largely the same. Many come to nothing, some get reasonably close, and every now and then there will be those that come to fruition. The clock is counting down to July 31st – and the world will be watching intently. The hope here will undoubtedly be that a second stimulus will be granted, and extra time is given to those who need it the most on this bumpy road toward recovery.
Either way, it will require that further preparations be made while readiness for the outcome whatever that may be – allows for a pain-free transition for all moving forward.