A bad crash or Bear stock market is coming. Reasons why it has not happened yet but will.

I believe the stock market will crash and/or have serious bear phase (steady downward trend) over the next year or so (i.e. by early-to-mid 2021). I predict a Dow bottom below 14,000 (a 45% loss from today's 25,800), and a TSX bottom below 9,000 (a 40% loss from today's 15,300), or worse. Perhaps much worse.

In a nutshell, my reason for this prediction is the job losses, bankruptcies, lowered economic output, and long-term impact on travel and other industries resulting from Covid-19. In my previous post I looked at data showing that the USA is still doing among the worst of all large countries regarding Covid-19, and they are opening up too fast so will I think inevitably have another wave or two, which would result in far greater economic damage than the first wave.

Contrary to the advice of my financial advisor, I am not putting any money (back) into the stock market, and will wait for the lows I predicted above, and/or signs of a successful vaccine.

I have been carefully dissecting the news and reading articles in the Economist, Bloomberg and other publications to figure out why the market has been riding high (unsustainably). Here are the key reasons, as far as I can see.

• Wealthier people will be OK (initially) because their jobs tend to be safer. Middle and lower income earners have less effect on the stock market.

• Many companies and industry sectors are doing well, benefitting from the pandemic. These include biotech, tech, e-commerce and several other ares (but see below my comments about airlines, retail, tourism, energy and other industries)

• No big financial stocks have yet crashed, which has tended to trigger other market crashes and recessions. Banks have set aside loan loss provisions, anticipating bankruptcies, but are mostly solid. An article in this week's Economist talks about this.

• US health insurance situation has in most places not hit a crisis caused by direct pandemic hospitalizations, as some had predicted at the pandemic's start (but beware the future, see below). A lot of people have been deferring care so health-insurance companies have not had to pay out yet.

• Business costs in some industries may be lower after this, as we now know that a lot of work can be done at home.

• Peak denial. There is an expectation of jobs quickly coming back, and a good future in coming years. Any threats of a second wave, failure of recovery of spending, cascading bankruptcies are just theoretical and are being discounting.

• Automated trading algorithms seem to be programmed without a history of a pandemic (as there hasn't been a bad one in recent decades).

• Government stimulus money is washing over the economy, and central bank policies such as quantitative easing and low interest rates is buoying the economy.

• Economy/market disconnect: The stock market is driven by greed and fear, and the economy is driven by other factors; It is not until the greedy and fearful really understand those other factors that swings in the stock market can reflect economic reality.

• Money has nowhere else to go. Bonds don't yield much in an environment where interest rates have been low for years. 

• High-enough good-news/bad-news ratio. People being at home can reduce crime, accidents, drug smuggling, protests and other sources of bad news ... until the awful recent racistevents caused protests. This may prove the tipping point.

So then what is likely to trigger a crash or bear market?

• There is a historically high market cap to GDP ratio, and GDP is clearly going down (compounded by the points below), making this worse. Potential downward impact, by itself, 10%.

• This pandemic is likely to last for a very long time. Even if we get a vaccine in early 2021, the economy will continue to be hammered until then, and will take a couple of years to recover at least due to other items on this list. Early thoughts that all we would have to do is 'flatten the curve' (prevent excess hospitalizations), and wait for a summer seasonal drop in cases, are proving incorrect as the pandemic is raging on. And if we don't get a vaccine in early 2021, we would ave to wait for herd immunity (4-5 more years)  or put up  with regular waves. Potential downward impact, by itself, 20%.

• Many parents will be unable to work (at all, or productively) until the end of summer due to lack of summer camps. And there remains uncertainty about schools in September. Potential downward impact, by itself, 2%.

• People are be getting fed up of physical distancing and lockdowns; negative sentiment about these is growing, creating risk for 2nd and 3rd waves as people spread the disease through social contact. Potential downward impact, by itself, 5%.

• Waves of bankruptcies and related layoffs are coming: Badly hit industries are just not yet reflecting how bad things are or will be: The worst-hit industries include or will include hospitality (hotels), tourism (with vast numbers of small businesses affected), travel (airlines), automobile sales and service (due to less travel and working at home), energy (due to decreased demand), retail, real estate (due to lack of rent for landlords, and fear of change while this is going on, and other factors), long-term care, and various other consumer products and services. Potential downward impact, by itself, 20%.

• Low consumer spending and bankruptcies will percolate throughout the economy with eventual effects on almost every industry. Potential downward impact, by itself, 30%.

• Too many economies are tied to the US economy, and the US is clearly in for a worse time with Covid-19 than anticipated. Potential downward impact on Canada 10%.

• There will be increasing social unrest. The Black Lives Matter protests are just part of it. And protests bring people into the street, where Covid will spread, resulting in a vicious circle. I dread the Covid numbers that will come out in 2-4 weeks. Cities with large crowds in the 1918 pandemic had huge second waves. Potential downward impact 10%, and would speed the eownturn.

• The big US health-care industry is likely to get into crisis. The badly 'designed' US health care industry with its antiquated reliance on a hodge-podge of private insurance will have a hard time dealing with the long-term unemployed, the waves of Covid-19, interspersed with higher demand for deferred treatments, the mental-health issues arising from the lockdowns, and the increase in poverty generally that will result. Potential downward impact, by itself, 5%.

• The dire Covid-19 situation in developing countries is only just now starting to become visible, resulting in a huge potential for mass migration and deepened poverty. The mass migrations of recent years (e.g. from Africa to Europe, Central America to the USA and as a result of the Syrian civil war, may be small compared to what could come. And mass migration would bring more Covid-19 unless we get a vaccine sooner rather than later. Potential downward impact, worldwide over the next 3 years, 20%.

• There will likely be fresh 'stunning headlines' that we can't predict such as vaccine trial failures, Trump inner circle getting sick, unexpected large financial institution getting into trouble, food system problems getting worse. These sorts of things trigger panic, and a connection of the stock market to the real economy. These might not contribute by themselves to downturn, but will speed it when they happen.

• Government help can't be sustained. Governments have gone all-out with spending, but it is not sustainable. They will likely have to start cutting before the crisis is fully over. And if they keep spending for 18 months, then sovereign debt levels themselves might trigger a massive downturn. This will slow the recovery, lengthening the market downturn and hindering rebounds.

• Automated trading: If any of the above happens suddenly, automated trading will likely make resulting crashes even worse and very fast.