A stock market crash occurs when the price of shares in the stock market drops dramatically and often unexpectedly. Economic conditions, catastrophic events, or volatile aspects that spread over the market can affect the abrupt decline in stock values. Market downturns are common, and various factors can trigger a stock market crash. The current stock market fall has been due to the conflict in Eastern Europe and concerns about increasing inflation and interest rates. Amid all these, few signs show that investors can expect the current stock market fall is over.
1. High Cash Levels
As the stock market in the US nears the end of a challenging first quarter, investors are considering what can help equities in the months ahead, with high cash levels at companies one possible boost as CEOs use cash for share buybacks and dividends or mergers.
Since the Covid-19 outbreak, S&P 500 suffered its first quarterly loss though it recovered in March. Thus, bringing the year-to-date decline down to approximately 5% from as much as 12.5% at the quarter’s low point.
Rising interest rates, as the Federal Reserve tightens monetary policy, and rising inflation and uncertainty about the Ukraine crisis continue undermining the current stock market’s outlook. However, companies’ ability to use cash could reduce a few concerns of investors.
While cash levels have fallen from last year’s highs, they remain well above pandemic levels and remain favorable for buybacks, dividends, and mergers and acquisitions – all of which are shareholder-friendly activities.
According to Truist, cash on S&P 500 companies’ balance sheets has fallen to over $1.9 trillion since peaking at slightly over $2 trillion in early 2021. However, this is still significantly higher than the $1.5 trillion (in 2019).
Cash levels, whether in the form of cash on balance sheets or the ability of businesses to access financial markets if necessary, remain strong.
According to Credit Suisse, buybacks and dividends will increase over the next 12-24 months, boosting EPS and share prices. According to Goldman Sachs, solid EPS growth and high cash balances will promote robust corporate demand this year.
M&A and buybacks are more unpredictable in terms of capital use, and they both imply a certain measure of corporate executive confidence. Both are falling off record highs.
Therefore, if that pattern continues, the markets should do well.
2. Job Growth
According to a jobs report, the US economy is recovering, and employers are hiring aggressively, adding 431,000 jobs (March 2022). It demonstrates the economy’s resiliency amid a still-destructive pandemic, Russia’s assault on Ukraine, and the highest inflation in 40 years.
Job creation reduces the unemployment rate, which is 3.6% today – the lowest rate since the pandemic and slightly higher than the half-century low of 3.5% set two years ago.
The government also revised its estimate of hiring in January and February by 95,000 jobs. Average hourly pay has risen to 5.6% over the past 12 months, good news for employees across the economy.
3. Bond Market Signals
Investors have mostly ignored a bond market recession signal triggered this week. In addition, 10-year and 2-year Treasury rates inverted for the first time.
For some investors, the inverted yield curve indicates that the economy is on the verge of a recession. However, the inverted yield curve does not forecast when one will occur, and history shows that it can take more than a year or longer.
The yield curve is considered the best market-based recession prediction. So, this appears to be scary. Many economists, however, feel that this time the inversion is different, and investors need not worry.
The five-year/30-year yield curve is not a great forecast. It never inverted until 2020, stopped inverting about two years before the 2008 financial crisis, and gave a false positive in 1994. To be more specific, different curves send out varying messages. The disparity between three-month and two-year bonds is at an all-time high.
It means that the meanings of the three-month/10-year and two-year/10-year curves are vastly different. Although it delays its signal until closer to the downturn, the former has generally been a superior recession warning. There hasn’t been much of a distinction between them in the past, and they have recently diverged stunningly.
4. Optimism in Ukraine-Russia Peace Talks
Despite day-to-day volatility, stocks made a strong return in the second half of March, with the S&P 500 rallying more than 10% from its year-to-date low. Market observers attribute the rally to optimism about the potential of a peace agreement between Russia and Ukraine and investors reacting to the Federal Reserve’s interest rate hike.
LPL Financial, on the other hand, believes that corporate earnings may be another factor driving the recent uptick.
Earnings have been strong despite the war and decades of high inflation. Projections for S&P 500 Index EPS over the next four quarters are higher. Although the forecast is small (1.5%), it is notable given the conditions – especially when contrasted to how other nations have performed.
Inflation leads to higher corporate profits since companies have more pricing power and may pass higher costs to consumers.
5. Strong Performance Of Stocks
According to LPL Financial’s Ryan Detrick, April has historically been a great month for stocks, with the S&P 500 returning positive in 15 of the last 16 years. Stocks are currently experiencing several challenges that might upend this historically strong seasonality.
Stocks began April on a positive note after the S&P 500 and Dow fell more than 4.5% in the first three months of 2022, ending their worst quarters. Stocks in the materials sector rose, and stocks in the healthcare, utilities and energy sectors also performed well.
US-listed Chinese stocks rose since there are reports that Chinese authorities will grant full access to auditing reports to US regulators.
- AMC’s (NYSE: AMC) stock rose to its highest level since early January. Porsche is reportedly collaborating with QuantumScape Corporation (NYSE: QS), a US lithium metal battery manufacturer, to develop an electric version of its 911 vehicle powered by solid-state batteries. Following news of the deal, QuantumScape’s stock soared.
- Amazon.com Inc. (NASDAQ: AMZN) rebounded to start the week, becoming the first mega-cap tech company to post a year-end profit. The e-commerce behemoth’s stock has risen to its highest level since January.
- Tesla Inc. (NASDAQ: TSLA) has seen some big swings this year and is preparing to split its stock for the second time in about two years. At this year’s annual meeting, the electric-car producer will ask shareholders to authorize more shares to permit the split. The announcement made the stock rise.
- Apple Inc. (NASDAQ: AAPL) ends its longest winning run this year after reports that the iPhone maker may slash manufacturing of its iPhone SEs by around 20% next quarter due to lower consumer electronics demand.
Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
Tim Thomas has no positions in the stocks, ETFs, cryptocurrencies, or commodities mentioned.
Featured image credit: Unsplash.