U.S. stock markets crashed between February and March. Since then, they have closed with gains in every month. After the Nasdaq 100 Index, the S&P 500 has also hit record highs. Many investors and marquee fund managers doubted the recovery. Now, they wonder why the stock market is so high despite economic pain amid the COVID-19 pandemic. Will the U.S. stock market crash again? Should you invest more after the stock market falls?
Why is the U.S. stock market so high?
The U.S. stock market has recovered from the crash. Last week, the S&P 500 also made a new all-time high. The U.S. stock market is the best performing major market this year. The U.S. has faired the worst amid the COVID-19 pandemic. However, the massive liquidity infusion by the Federal Reserve and the over $3 trillion stimulus package announced by the U.S. government helped support the economy.
Also, most of the economic data over the last few months showed a swift recovery. When U.S. stock markets crashed, analysts had a bleak economic outlook. J.P. Morgan expected the U.S. unemployment rate to rise to 20 percent, while Goldman Sachs expected it to rise to 25 percent. In contrast, the U.S. unemployment rate fell from 14.7 percent in April to 10.2 percent in July.
The double bottom that never came
As the U.S. stock market started to rally in April, fund managers like Paul Tudor Jones and Mark Mobius expected another crash. They predicted a double bottom. However, the U.S. stock market hit new all-time highs. The markets got too pessimistic about U.S. companies' prospects. Over 80 percent of the S&P 500 companies posted better-than-expected earnings in the second quarter, which were much higher than historical averages.
The sharp rally in mega-cap tech stocks like Apple and Amazon also helped the U.S. stock market recover from the crash. Apple has a 6.5 percent weightage in the S&P 500. By their sheer weight in the index, tech stocks were able to move the index higher. The rally in tech stocks also helped improved sentiments and other sectors joined the party.
Will the U.S. stock market crash again?
U.S. stock market valuations appear to be on the higher side. Warren Buffett net sold over $13 billion in stocks in the second quarter, which signals that the legendary value investor isn't too optimistic about the markets. There are several factors like rising U.S.-China tensions, the upcoming U.S. presidential election, and soaring valuations that could trigger the next U.S. stock market crash.
How to prepare your investments
If you expect the stock markets to crash, you should lower your equity exposure and move to safer assets like short-term investment-grade corporate debt. You can also look at moving from growth stocks to value stocks. Currently, it may even be a good idea to book profits in some of the stocks where valuations have started to look really overstretched.
Should you invest more if the U.S. stock market crashes?
If the U.S. stock market crashes again, you should ideally invest more. The simple rule in stock markets is to buy low and sell high. If stock markets fall and you are able to get quality stocks at a reasonable price, you should take the chance and get a little greedy. Remember, investors who get greedy when fear is prevailing end up making high returns. We saw this in the 2008–2009 U.S. stock market crash, the crash in the fourth quarter of 2018, and again this year when the U.S. stock market crashed in the first quarter.