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…After peaking on Feb. 19, 2020 the S&P 500 has now experienced the fastest 20%-plus decline from the peak in the history of the U.S. stock market… tempting many to seek “bargains” to buy. However, I regret to inform you that the worst is yet to come. The following factors, among others, will drive indiscriminate liquidation in the following days:
The current bear market is about to enter into a second, and more difficult, stage.@A Financial Site For Sore Eyes & Inquisitive Minds
- The first leg of this decline was primarily driven by professional selling – professional traders and fund managers selling and unwinding positions. The selling by professional investors is far from done.
- However, the second leg of the decline will be driven primarily by mass selling on the part of individual investors who will now start to massively and simultaneously liquidate their stock portfolios and fund holdings – from their private accounts and retirement accounts. Both mutual funds and ETFs will be forced to liquidate their portfolios in order to meet redemption and sales.
Below are some of the factors…that will drive indiscriminate liquidation in the following days:
1. Fear hits home
With the news that:
- the NBA, NHL, MLS and MLB have suspended their seasons,
- virtually all public gatherings will cease,
- Amazon and many other companies have told their workers to stay home,
- many companies having already laid off their workers,
- and with the stark reality that store shelves across the country are empty
the COVID-19 crisis has now become real for many people. Until a couple of days ago, for most Americans, this was still just some kind of flu that was affecting a few people in other countries.
Today, most Americans for the first time are going to seriously think about how they are going to survive both economically and health-wise through this period…[and will start to] liquidate their direct and indirect holdings of stocks – massively.
2. Small businesses shut down and face bankruptcy
Small businesses in the U.S. account for 50% of all employment [and]
- because
their[there] will be few customers, restaurants, shops, stores, and service-oriented businesses that directly tend to the public [they] will be forced to shut down and lay off their workers. - Few small businesses have lines of credit that will enable them to pay their workers for several weeks or months until business can resume.
Small business owners will sell their stocks and funds and so will their employees, to raise cash.
3. Credit crunch
There’s currently a “run” on American banks; not a run on deposits, but a run on credit lines in corporate America.
Every company that has a credit facility is trying to withdraw the funds right now but banks…will do everything possible to avoid extending credit to troubled businesses – and right now, that’s the great majority of businesses in America. As such, many companies will not be able to cash in on their credit lines and those that don’t have large credit lines already – which is most small and medium-sized companies – will be shut out…
As people start to learn more about how companies will start to fail…[because] they are unable to access credit to fund their operations, they will become frightened and indiscriminately sell stock.
Intervention Failure
- Yes, I do expect…dramatic government measures to be implemented by Congress, the Treasury, the Fed and various arms of the U.S. executive branch and,
- yes, some of these measures might trigger some bear market rallies – potentially even some very large ones – but,
- in the end, however, regardless of whatever government measures…can be mustered, the virus will continue to spread and wreak its havoc on…public health and…the U.S. economy, creating panic on Main Street…[which will cause] massive numbers of people that live on Main Street to sell everything they have on Wall Street…
Conclusion
…Now more than ever you need a strategic portfolio management plan to preserve your capital and capitalize on the current turmoil… This is a real crisis – it’s not going to be a short-term problem. The coming 12-18 months are going to be very long and difficult times.