Investors have been on a selling spree this month, with the TSX Composite Index down 3.6% in three trading sessions. There could be many reasons for the pullback, and one of them could be the end of the Canada Revenue Agency’s (CRA) $2,000 Canada Emergency Response Benefit (CERB). I have been writing about the potential market crash that could be triggered by the easing of the fiscal stimulus package. The stock market crash was long due. But the emergency benefits put cash in the hands of people and businesses, thereby delaying the crash.
Why is the stock market falling?
The end of CERB is not the end of the stimulus package, but a shift toward recovery benefits from emergency benefits. The stock market is probably reacting to this shift as people are cashing out their investments to prepare for September. A few days back, I wrote how September is challenging for your finances, with the 2019 tax bill and the payment of CERB alternatives due towards the end of October.
Another possible reason for the recent decline in the stock market is the weakness in U.S. markets. The NASDAQ Composite Index and the S&P 500 Index have dipped 7.5% and 6.7%, respectively. The US markets declined as the uncertainty is creeping in around another fiscal stimulus package, the U.S. election, and trade tensions with China. One thing that investors hate is uncertainty, which is what makes stock markets volatile.
Is the stock market on the brink of another crash?
Many signs say that the stock market is nearing another crash. The stocks market bulls were not in sync with the contracting gross domestic product (GDP). The Buffett Indicator hinted that the equities are way more overpriced than they were before the 2009 Financial Crisis and the dot.com bubble. Justin Trudeau’s government is easing the benefit by replacing the $80 billion CERB with the $37 billion recovery package. This shift might create panic among unemployed Canadians as they are unsure if they would qualify for the new benefits.
Now on the technical front, the TSX Composite Index has already declined below its 50-day simple moving average (SMA). If the index falls by more than 2%, it would breach the 200-day SMA, creating a pattern similar to the end of February. In the last six trading days of February, the TSX Composite Index fell below its 50 and 200-day SMA. And within three days of breaching the 200-day SMA, the market crashed.
Now, this crash can be averted if the buying activity returns in the next two trading days, pulling the index above the 50-day SMA. Until then, I would suggest you prepare for the stock market crash.
What should you do in a market crash?
If you have lost money in the March market crash, don’t repeat the mistake. Warren Buffett says that market crash is an opportunity to buy. If you are prepared for a crash, you can make money from it. Follow this three-step strategy in a market crash.
- First, don’t panic and sell. Even your most profitable investment will fall in a crash. This doesn’t mean you sell your money-making instrument.
- Second, stay invested in good stocks that have been giving you handsome returns for years.
- Third, keep cash ready and buy fundamentally strong stocks in a dip.
In a market crash, all types of stocks fall, even if they have strong growth potential. This gives you a window of opportunity to buy a good stock at discounted prices. Think of it like the end-of-season sale where you get the same product at a 20%-30% discount.
One stock to buy in a market crash
Shopify (TSX:SHOP)(NYSE:SHOP) has proved its worth during the pandemic-driven lockdown. Although the company may not see the lockdown-level transactions, the pandemic has upped its overall transaction volume. Grocers and food companies are selling on the Shopify platform and they sell in huge volumes.
Investors priced in their bullishness in the stock price, which reduced its upside potential. The stock is down 17% from its 52-week high to $1,233. It has the potential to return to its 52-week high in the fourth quarter as holiday season demand drives its transaction volume.
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.