The third-quarter earnings season has already kicked off, as many small- and medium-sized companies continue to struggle due to the prolonged pandemic-related headwinds. The Canadian stock market benchmark is on its way to end the third consecutive week in negative territory with largely disappointing Q3 earnings.
The S&P/TSX Composite Index has slipped by nearly 4% during the week as of Thursday’s closing — fueling investors’ worries about another market crash. Let’s take a look at three key reasons why the stock market could crash in November.
Prolonged pandemic
The year 2020 began on a terrible note for global stock markets, as the coronavirus started spreading across the globe from China. The virus has killed 1.18 million people worldwide — with nearly 45.1 million people getting infected so far.
The pandemic has proven to be disastrous for world economic growth. Many large countries — including the U.S. and Canada — decided to impose strict shutdowns to stop the spread of the virus. While these shutdown measures arguably helped to slow down the infection rate, they certainly paralyzed the corporate world with the day-to-day business operations coming to a halt.
Now, when the economy across North America has gradually reopened to a great extent, the second wave of COVID-19 seems to be lurking around the corner. With the festival season approaching, people might find it difficult to follow social-distancing guidelines, which are crucial to slow the virus spread. Due to rising cases of daily infections, the administration is already considering imposing shutdowns in areas where the infection rate is significantly high.
If the pandemic’s second wave turns out to be similar to the first wave — if not worse — then it would be difficult for many small- and medium-sized businesses to survive. While the Canadian government has already spent billions of dollars to support these businesses, it might not be feasible for the authorities to provide more of such relief during the second wave. Such a situation could definitely lead to a market crash in the coming months.
Troubles in the energy and gold sector
During the ongoing earnings season, most energy companies continue to report big losses due to weak demand. For example, Suncor Energy (TSX:SU)(NYSE:SU) announced its results earlier this week. It reported a massive $302 million adjusted net loss in the third quarter compared to a $1.1 billion profit in the same quarter of 2019. Lower energy demand amid the pandemic — along with narrowing cracking margins — took a big toll on Suncor Energy’s bottom line in the last quarter.
Low energy demand is also taking a big toll on energy firms’ revenues. In Q3, Suncor Energy’s revenue fell by 35% to $6.5 billion — much worse than $9.9 billion in the third quarter of 2019.
At the same time, the recent drop in gold prices is putting pressure on gold stocks. With no hopes of immediate economic recovery, energy stocks might continue to face troubles in the coming quarters. A sell-off in these two sectors could also lead to a market crash in the coming months.
The U.S. presidential elections
While the Trump administration has been widely criticized for its handling of the pandemic, its many business-friendly policies, including corporate tax cuts, have made life easier for many big companies. In contrast, his Democratic rival Joe Biden has recently opened up about his plans to transition from oil to renewable energy, which might trigger another big sell-off in energy stocks. Early polls suggest Biden is taking the lead in many states against Trump.
Also, investors have largely reacted positively to the U.S. presidential results if the republican candidate wins. Overall, these factors raise the possibility of a big market crash in November.
