Is the Stock Market Crash Over?

I believe the stock market rally is overdone. Valuations are still too high. Cautious investors should probably wait on the sidelines a little longer.

falling red arrow and lifting

Image source: Getty Images

The stock market has rallied in recent days. The S&P/TSX Composite Index is up 24% since March 23. That’s technically called a “bull market.” So, are we, in fact, in another long-term rally? Is the historic stock market crash of 2020 over?

Here’s a closer look. 

Lingering issues

Although the stock market seems to have recovered, the economy hasn’t. The vast majority of the world’s population is currently on lock down. Every aspect of the global economy, besides essential services, have been paused. This is unprecedented.

Although the economy is paused, financial terms are not. Mortgage interest is still accumulating, utility bills still need to be paid, and families need to put food on the table. Plenty of businesses and families have suffered a loss of income, but expenses remain the same. 

These issues are not being reflected on the stock market. However, they are being reflected in other data. Unemployment in Canada hit a record high this month. Half a million people have applied for mortgage deferrals. Nearly a million have applied for the Canada Emergency Relief Benefits (CERB) program. 

As the shutdown drags on, perhaps for months, these numbers could rise. Economic damage on this scale could take years to climb out of. This gloomy scenario is not being reflected in the stock market.  

Stock market valuation

The Canadian stock market is currently worth $2.3 trillion. That’s 98.2% of the nation’s gross domestic product. Generally, a stock market-to-GDP ratio below 100% represents undervaluation. However, in 2020 Canada’s GDP is widely expected to decline. 

Major banks expect Canada’s GDP to shrink by a jaw-dropping 20% in 2020. That forecast could be wrong, but it indicates the historic nature of this current disaster. If GDP does drop by double digits, the stock market still seems overvalued. 

In short, the stock market crash could be far from over. Investors may want to wait for a bigger dip ahead.  

Smart money

Another reason I believe we haven’t seen the stock market crash isn’t over yet is the pin-drop silence from the smart money. Warren Buffett has sold his airline stocks, but he hasn’t bought anything substantial. Considering he has a $128 billion war chest, he’s obviously waiting for better valuations. 

Similarly, major asset managers and private equity companies haven’t made big moves. No one is swooping in to buy distressed iconic properties or cruise lines. There’s no sign of multi-billion-dollar mergers or acquisitions. Ray Dalio or David Tepper haven’t stepped in yet either. 

Smart money moves are usually a beacon for where the market is heading. When you see the Norwegian sovereign wealth fund or Ontario Municipal Employees Retirement System (OMERS) buying assets, that’s a green flag. For now, there’s no sign of green flags.   

Bottom line

Over the past two months, the stock market has gone from sheer terror to utter optimism. Investors seem to believe the pandemic will be over soon. The way the stock market has rallied, investors seem to be betting on a “V-shaped” economic recovery. 

I believe the rally is overdone. Valuations are still too high. Cautious investors should probably wait on the sidelines a little longer. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned.

More on Coronavirus

Dad and son having fun outdoor. Healthy living concept
Dividend Stocks

1 Growth Stock Down 15.8% to Buy Right Now

A growth stock is well-positioned to resume its upward momentum in 2024 following its strong financial results and business momentum.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Stocks for Beginners

3 Things About Couche-Tard Stock Every Smart Investor Knows

Couche-tard stock (TSX:ATD) may be up 30% this year, but look at the leadership and history of the stock to…

Read more »

Plane on runway, aircraft
Coronavirus

Can Air Canada Double in 5 Years? Here’s What it Would Take

Air Canada (TSX:AC) stock has gone nowhere since 2020. Can this change?

Read more »

Senior housing
Stocks for Beginners

Home Improvement Stocks Are Set to Fall (When They Do, Buy These Like Crazy!)

Home improvement stocks are due to drop further in the coming months. But with solid underpinnings for the sector, it…

Read more »

An airplane on a runway
Coronavirus

Forget Boeing: Buy This Magnificent Airline Stock Instead

Boeing (NYSE:BA) stock is looking risky right now, but Air Canada (TSX:AC) stock? Much less so.

Read more »

Man considering whether to sell or buy
Stocks for Beginners

Goeasy Stock: Buy, Sell, or Hold?

When it comes to smart buys, goeasy stock (TSX:GSY) is up there as one of the smartest money can buy.…

Read more »

Woman has an idea
Stocks for Beginners

Here’s Why Magna International Is a No-Brainer Value Stock

Magna stock (TSX:MG) has been climbing back once more, but still offers huge value for long-term minded investors.

Read more »

Aircraft wing plane
Coronavirus

1 TSX Stock Down 60% That Could Bounce Back Stronger

Air Canada (TSX:AC) stock got severely beaten down in the March 2020 COVID crash. Here's why it's probably not going…

Read more »