Will the stock market crash again?

Hey guys, welcome back to the channel! In this video, we're going to be doing a bit of an update video on my thoughts around where the market is at the moment and whether we might see some poorer market conditions going out into the future.

You probably saw maybe about a month, month and a half ago, I made a video where I was talking before the Q1 results were released about whether we could see the market fall after it had rebounded in a certain way. Now since the Q1 data was released, actually the market has significantly rebounded, and I found that really interesting because I was expecting Q1 to be quite bad. For most businesses, it was pretty bad, but the American market has held up by pretty much five major stocks: Microsoft, Apple, Amazon, Facebook, and Google.

What was really interesting is that a lot of these businesses didn't actually suffer too badly through Q1. If you think about it, like Amazon, their deliveries went absolutely through the roof. Facebook, I mean, people were scrolling like crazy. Same with Google; there was a lot of attention on places like YouTube, so viewership went up. These five companies alone account for about 20% of the S&P 500, so a lot of the weight of the S&P 500 is in these five companies.

These five companies actually didn't get destroyed during Q1, so that really did hold up the market. We've continued to see now, indicating that the market has continued to rebound. It looks pretty much like a perfect V. Essentially, these five stocks, grouping together, have a lot of the weight in the S&P 500. They didn't get hit too badly, and they really are supporting that market, allowing it to rebound. Plus, at the moment, we've got positive news now coming out about the United States, you know, going to open back up and business getting back to somewhat normal.

So all of these positive factors are causing the market to go straight back up. It’s looking at the moment like it's going to be a pretty perfect V-shaped recovery. In fact, it's almost back to where it was. You know, mid-February, where I think if you look from mid-February to now, where we are now in June, the S&P 500 has only dropped by about four and a half percent. So it's a pretty perfect V-shaped recovery. It's basically back to where it was.

However, having said that, I still don't believe that the market is out of the woods yet. Even though it looks like it's just come straight back up, I don’t believe that we’re just going to get completely back to normal and the market's going to be fine, continuing to tear up into the future. Of course, I don’t know that; like of course no one can predict where the market’s going to go in the short term. But there are a couple of factors that have really been playing on my mind where I think that we could potentially see some more negativity out of the stock markets in the not-too-distant future.

So in this video, let's talk about them. The first one, which is kind of a point, kind of not a point, is the fact that Q2 numbers are still yet to come out. We knew that Q1 was going to be bad, and for most companies it was, but we also knew that Q2 was likely going to be worse because, remember, we were really only affected for one and a half months of Q1 because the lockdown really started in mid-February.

So you had the end of February and then all of March. But now what we're sitting through is, you know, April, May, and June; the lockdown is still going on. So businesses are still hurting, and they're still suffering from the fact that they can't open up completely and generate the same revenues as before the whole situation. The Q2 numbers are going to be announced at the end of July; they'll start coming out, and we could see those numbers for a lot of companies still be quite bad.

Now the argument against this affecting the market is that we kind of already know that’s coming, so there’s a high probability that that has already been priced into these different companies. It has been priced into the market. But you always see when earnings season comes around, earnings come out, and stock prices definitely swing a fair bit on earnings releases. So that is one potential reason why we could see the stock markets get pulled down further: the fact that basically all companies out there have been affected through the whole of Q2.

So the Q2 numbers could look quite bad. But let's move on to the second reason why I feel as though the market could definitely fall from its amazing rebound that we've seen over the past month or two, and that is when you look at unemployment. Now it's pretty crazy; in the United States, unemployment was at about 3.5%, then it shot up to, I think it was at 14.7%, and now it's fallen back down to 13.3% in June. So it's going in the right direction, but obviously an unemployment rate of 13.3% is still enormous.

Now, in all honesty, I think that the performance of the stock market generally is definitely going to be pretty closely related to what we see happen with the jobs recovery. Because here's what could happen: we could see everywhere opens back up, and that's fantastic, and you know everyone gets back to work. Yes, while we did see a massive spike in unemployment, the fall back to, you know, really low unemployment rates could be almost instantaneous as everyone just goes back to work. We could see that, and we could have a really big and really sudden improvement in the unemployment rates, and if that's the case, then the market will probably do pretty damn well.

Okay? And that's good for everybody. But what a lot of people are talking about at the moment, and I happen to sit more on this side of the fence, is that I feel as though the job recovery won't be instantaneous. I feel like it is going to take a fair while to come back down, and a lot of people are predicting that that unemployment number is no way it's going to go back down to where it was at 3.5%. It is going to remain significantly higher than that for quite a while.

Now, of course, that all remains to be seen, but I think the market right now is priced where it's expecting everything to go a hundred percent according to plan: unemployment went up, but it's coming straight back down; we're all going to get back to normal. I'll talk a little bit more about that in a second, but I feel as though if that doesn't happen, if the jobs numbers don’t go straight back to what they were before, then that is going to be a significant stimulus that could see the market fall down.

Because unemployment is really important; unemployment sets in motion a bit of a negative economic cycle, right? Because, I mean, 13.3% of the population unemployed is a significant percentage of the population, right? Because everyone’s under this financial pressure at the moment. We're not spending as much, right? So especially when you're unemployed, your spending gets pulled right back. Okay? If that happens en masse, then all of a sudden we’re not spending as much.

That means that for companies out there that are operating in the United States, then they're not selling as much because people are deliberately trying not to buy things. So once that starts happening, then what you see is these companies are no longer bringing in these fantastic revenues. What they do then to cut costs to make sure that their financials aren't too heavily impacted and their business survives is that they start cutting costs by cutting employees.

So if that happens, then you get a bit of a negative spiral because then you end up with even more people that are unemployed. As companies cut costs, even more people that are unemployed means spending by those people gets reined in even further, which creates a bit of a cycle. So that's why I actually think that when it comes to how the stock market might perform in the next little while, I think it's got a lot to do with how this jobs number recovers.

So we definitely need to keep an eye on how quickly the jobs numbers recover and to what extent they do recover. Hopefully, everything recovers, and then it's business as usual and everyone keeps their jobs. But I like to be an optimist, but unfortunately, I just don’t see that happening.

Now, with that said, there are two more factors that I wanted to talk about, which do have some relevance in talking about the current state of the stock markets. These two things are really trying to help us answer whether the stock market is currently overvalued or undervalued. Like, if we just look at price and earnings, and that sort of stuff, is the market overvalued or is it undervalued?

Now, I talked about this a little bit in my last video, and we’ll fly through this because, of course, we talked about the Shiller PE. This is the absolute number one metric that I go to to see whether the market is overvalued or undervalued. Now, the Shiller P/E compares two things: it compares the price of the S&P 500, and it compares that with the average earnings of the S&P 500 over the last ten years.

Okay? So it’s a CAPE ratio; it’s a cyclically adjusted P/E ratio. But essentially, what this means is the average Shiller P/E is about 16.5, which means that on average to buy into the S&P 500, on average, investors accept a price that is 16.5 times the earnings of the S&P 500.

Now what we’re seeing at the moment is that this number is at about 30. Okay? So it is extremely high versus what the historical average is, and what that means essentially is that the moment investors buying into the S&P 500 are thinking that the market is just going to do absolutely brilliantly because they're settling for buying the entire market at almost double the valuation as what they normally would settle for.

When you really think about this, this highlights a point that Hamish made on our last podcast: the market seems to be getting more and more detached from the reality of the economic situation that the world is currently in. The market is currently priced at about two times its historical average, which means that investors are essentially saying that the economic conditions we’re currently in are basically two times as good as what our normal economic conditions are.

If you ask me whether that’s true or false, I say that’s false. I do not agree with that. However, that is literally what the Shiller PE is telling us: investors buying into the S&P 500 right now are willing to accept half the value for money that they normally get just to own these companies. So they are expecting in the next year or so very, very strong growth in earnings of these companies.

Now, personally, I don’t believe that’s going to happen, but it’s interesting to see exactly what investors are expecting. I mean, this number is historically very, very high despite what we’re seeing happen at the moment. Anyway, so that’s the first number I wanted to talk about.

The next number I like to look at is, of course, the Buffett Indicator, the Wilshire GDP. Now what this number does is it compares the Wilshire 5000, so total market index, and it compares that with the total American GDP. So it’s comparing basically the total U.S. market to the total U.S. GDP, gross domestic product. Typically, what we find is that when the market cap of the whole country starts creeping up above a hundred percent of GDP, that’s quite an overpriced stock market.

What we’re seeing at the moment is this number is at record high levels. It is currently over a hundred and seventy percent; this has never happened before in history. This is the highest it has ever been: uncharted territory. And to me, looking at the Shiller P/E, you look at the Wilshire GDP, just general market valuation numbers, and you're just left thinking, man, investors are really expecting stellar performances out of these stocks just across the board, and I feel like this may not happen.

Now, of course, I always say this when I talk about, you know, the market in general and valuations and blah blah blah; in the short term, there’s absolutely no way that you can accurately predict what is going to happen in the markets. Like, even though we’re looking at these numbers and Shiller P/E is through the roof, Wilshire GDP is through the roof, and Q2 earnings look like they’re going to be absolutely terrible, and we’ve got unemployment rates that are way up here, and we just don’t know how quickly they’re going to come back down.

Even with that said, we don’t know what the market is doing. However, I just sit back and think about things, and I look at these different factors that are going on right now, and to me, the stock market literally looks like it is becoming very detached from the economic situation they’re in. I mean, I don’t know if the market’s going to go up or down, but if I had to guess, looking at all things considered, I’m like, wha man, it is just the market right now is just set up to fall, if you ask me.

It’s just really expensive at a time where economic outlooks are just really bleak. I mean, we’re not even taking into account the fact that all of the world’s best investors are currently coming out basically saying, yeah, we’re going to go into a long and deep recession. Even not even listening to what they have to say, things just look sketchy from any which way you look at it.

So overall, I think that there will be a higher probability that over the next 12 months or so, the markets are going down rather than up based on valuation, based on economic conditions like unemployment, all that sort of stuff. But overall, that’s just my opinion, and I definitely encourage you, now that you’ve heard my opinion, to go hear some other opinions out there.

There are heaps of videos on YouTube going around at the moment on both sides of the page. I’d love to hear what your opinion is, so definitely leave that down in the comment section below. You know, do you think we are out of the woods and the stock market’s just gonna keep charging up from here? Do you think we’re on shaky ground? I would love to hear from you guys, so leave that stuff down in the comment section below.

But that’ll do me for today. Leave a like on the video, of course, if you did enjoy it or if you found it useful. I super appreciate it because it definitely helps out the channel. And make sure you check out Profit -- Fill as well if you are interested in learning how to get started with investing. Whether you want to be a passive investor participating in the market or an active investor like Warren Buffett, following that sort of finding high-quality businesses, if you want to follow that sort of approach, there’s a course on Profit -- Fill for that as well. So check those out if you’re interested.

Overall, thanks very much for watching, guys, and I’ll see you all in the next video. [Music] [Music] [Music]