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Significant overvaluation and fears of a second-wave of coronavirus are making investors nervous about the stock market.
A few days ago, billionaire investors warned that the U.S. stock market could crash as stocks are overvalued.
Hedge fund manager Stanley Druckenmiller said that risk-reward for equity is the worst he has seen in his career. Markets appear too high with regard to uncertainty and likely bankruptcies looming on the horizon.
Druckenmiller believes that a V-shaped economic recovery is a fantasy. Billionaire investor David Tepper said the stock market is the second most overvalued in history, just behind the dot-com bubble in 1999.
President Donald Trump thinks those billionaires are just trying to manipulate the market. In a tweet, he said to be wary of wealthy investors who use their platform to comment negatively on stocks to profit from a crash.
But it turns out billionaire investors are not the only ones who think the market rally will collapse. A majority of investors are becoming more pessimistic about the stock market.
Fewer Investors Expect Stocks To Go Up
In an Evercore ISI survey of 560 investing and corporate clients May 11-13, less than a quarter of participants said they expect the next 10% move in stocks to be higher. Investors are even more bearish than they were when the market hit bottom in March.
Less than 25% of investors believe the next 10% move in stocks will be up. | Source: Bloomberg
The main reason why investors believe the market will crash is the risk of another virus outbreak as countries start to reopen economies.
Investors are afraid that a second coronavirus wave would plunge the world into a deeper recession and put an end to the market rally.
Investors are also concerned about the stock market valuation. Stock prices haven’t been that high relative to earnings since the dot-com bubble.
Negative commentary from investing legends this week along with concerns over a second wave didn’t help sentiment. Investors view a 2nd wave as by far the biggest risk for the market followed by valuation.
After the Dow Jones plunged into a bear market in March and then had one of its strongest recoveries in decades, the blue-chip index has been going up and down with no clear direction.
The Dow is roughly at the same level it was one month ago. | Source: Yahoo Finance
A Market Crash Is Highly Probable
Are investors right to think the next big move will be down? Nobody knows what the next move will be, but unfortunately, a crash looks highly probable. We won’t get rid of the coronavirus anytime soon.
Dr. Anthony Fauci said during a webinar that a second round of COVID-19 cases in fall is inevitable. Dr. Greg Poland, a professor of medicine and infectious diseases at the Mayo Clinic, warned that the second wave of a pandemic is often worse than the first.
Researchers from the Center for Infectious Disease Research and Policy (CIDRAP) suggest that the COVID-19 pandemic won’t end until 60% to 70% of the human population is immune to the virus. But this could take up to two years.
As millions of Americans lost their jobs and retail sales plunged to a record low, stock prices shouldn’t be that high. Most retailers’ profits are going to fall as sales are down.
GDP will shrink as consumer spending is lower.
(Sources Business Insider, CNBC, Stanley Druckenmiller, David Tepper, Bloomberg, CTVNews, CNN, CCN)
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