Is Michael Burry’s Prediction of a Stock Market Crash Coming True Now?

U.S. stock markets opened sharply lower on July 19. Despite several headwinds including high inflation, fears of a rate hike, geopolitical tensions, stretched valuations, and COVID-19, stocks surged to a record high to the disbelief of many fund managers. Why are stocks dropping today? Is it just a blip or will there be more pain ahead for the markets?

As of 10:30 a.m. ET, the Dow Jones was down by over 800 points, while the Nasdaq was trading down over 1.5 percent. The broad-based selling and reopening plays like airlines and cruise stocks are among the worst affected.

Multiple factors are at play behind the crash in markets today. First, COVID-19 cases in the U.S. have been on an uptrend and the Delta variant has been spreading among people who aren't vaccinated. The pace of vaccination has slowed in the country. There are also fears of a slowdown in growth.

Also, reports suggest that the U.S. and NATO allies could blame China’s Ministry of State Security for the cyberattack on Microsoft Exchange email servers that took place in March. U.S.-China relations haven't improved under the Biden administration and if anything, they have continued to nosedive.

We are amid the earnings season. While earnings have been good so far, there are fears that we’ll enter into unfavorable YoY comparisons in the coming quarters. Earnings are rebounding on a yearly basis in the second quarter of 2021 on the back of lower base effect as earnings were subdued in the same quarter in 2020.

Meanwhile, Jim Cramer expects stocks to fall between 3 percent and 5 percent. However, he doesn't think that this is the end of the bull market. He attributed the fall to fear in the market. He also advised investors to look for high dividend-paying stocks given the current scenario.

Morgan Stanley expects stocks to fall another 10 percent–20 percent. This could mean a correction at the least and a bear market at the worst. U.S. stock markets entered a bear market in the first quarter of 2020 ending the historic 11-year bull market. However, stocks rebounded from the lows and we entered a new bull market even though most fund managers warned of a crash.

So far, cruise and airline stocks have been weak even as US stock markets surged to record highs. These stocks had run up a little too far and the COVID-19 pandemic still isn't over.

Fears about a resurgence of coronavirus are leading to a sell-off in reopening names like airlines and cruise stocks. While cruise stocks surged, markets paid little heed to the huge amount of debt that they have had to raise over the last year. The extravaganza would ultimately have to be repaid.

A few weeks ago, Michael Burry warned about a stock market crash. He rose to fame by correctly betting against the housing market in the 2008 global financial crisis. However, some of his recent predictions haven’t come true. Burry also revealed a massive short position in Tesla stock. The stock has looked weak in 2021 and is trading with a YTD loss even though legacy automakers are trading with massive gains.

Coming back to the fall in stocks today, it's too early to call it the beginning of the crash. However, a healthy correction was due for the markets after an almost unidirectional move since the lows on March 23, 2020.