The stock market has rallied since the market crash that took place back in March. However, the danger for investors is getting too complacent and assuming that all is well again, and that the bull run is going to resume as normal. The reality is, there are forces present today in the economy that will likely lead to a significant market crash, and it’s only a matter of time when that happens.
Here’s why another, bigger, market crash is still likely to take place before the year is over.
More companies will go under
As bad as things are right now in the economy, they’re about to get worse. And one of the reasons is that there are more bankruptcies coming. According to data from the Office of the Superintendent of Bankruptcy, 27 companies received protection from creditors under the Companies’ Creditors Arrangement Act in the most recent quarter. That’s the highest number since 2009 — the last time there was a recession.
Many companies are just hanging on right now. A good example is Cineplex; lockdowns and restrictions could lead to the company simply running out of cash and time. And with more bankruptcies come more job losses and more Canadians out of work. Not to mention the bearishness that news of more bankruptcies could trigger in the markets.
CERB will run out sooner or later
The Canada Emergency Response Benefit (CERB) is likely going to come to an end before the year is over. The latest extension puts the program’s end date at October 3, and it’s not probable that there will be another one. The country is already digging itself into more debt, and there’s mounting pressure to change or eliminate the benefit entirely.
Once the CERB ends, and as people resume paying mortgages as deferrals also come to an end, that’s going to cause a strain on the economy. People who may have been doing okay during the pandemic thanks to the CERB may find themselves struggling. That could result in less trading activity, which could lead to many stocks cooling off and even starting to decline, potentially leading to a market crash.
What should investors do?
For investors, the first thing you should do is look at your investments and assess which ones may be overvalued and near their peaks.
Shopify (TSX:SHOP)(NYSE:SHOP) is a good example of a stock that may soon hit a ceiling and where a market crash could destroy its valuation. Although the company is coming off a strong quarter, the reality is that its valuation has already been astronomical for some time now. Its market cap is the highest on the TSX, and while it’s doing well now, that may not be the case when the economy grinds to a halt, because people have lost jobs and are tight on cash.
Shopify’s incredible 97% growth rate this past quarter is unsustainable moving forward. As people spend less time at home and have more things to do rather than just shop online, the tech company’s numbers will feel the impact of that. And so, while a stock like Shopify certainly looks great right now, that doesn’t mean that’ll be the case months from now, and certainly not during a crash when investors will look to dump overpriced assets.
But whether it’s Shopify or any other stock, investors need to take a good, hard look at whether the businesses they’ve invested in are likely to keep performing well, even as the economy struggles. Few companies will be able to, and that’s why if you’re paying a hefty premium for an investment right now, it may be a good idea to sell it before another market crash cripples its value.
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Fool contributor David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Shopify and Shopify.