Side Effect of Coronavirus: The Great Stock Market Crash and Recession of 2020

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A deep economic recession, triggered by a stock market crash, looms over 2020 for 2 reasons: (1) the stock market has not factored into pricing the impact of the Coronavirus, and (2) diminished corporate stock buybacks during falling earnings are leaving the market unsupported and employees vulnerable to massive layoffs.

Although stocks have thus far resisted coronavirus concerns, commodities have not. The demand for oil has collapsed following the outbreak, and the price is trailing.  China is the world’s second largest oil consumer, and the country-wide lockdowns have caused a 20% decline in demand for oil.   Copper prices, another traditional economic indicator, have also fallen due to China’s reduced demand. With hundreds of millions of people quarantined, and massive company shutdowns by the Chinese government, the Chinese economy appears headed toward a wall. 

Thanks to the low-interest rate policy of the Federal Reserve and the massive corporate tax cuts by the Trump administration, corporations have incurred record amounts of debt used primarily to buy back their shares and to bonus executives instead of investing in their core business and increasing wages. This excessive demand has pushed stocks to record highs despite falling earnings for several consecutive quarters.  However, these buybacks at artificially inflated prices have largely ceased now, causing stock prices to lose their support.  Corporate executives coping with falling earnings and huge debt will soon be faced with a choice of not repaying the debt, minimizing their own bonuses, or massive employee layoffs.  You can probably guess which option they will choose.

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