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After the drastic turn in the market this week, the biggest fear for investors just switched from whether the economy is growing fast enough to whether another stock market crash is coming.
In the finance industry, we call that a "dead cat bounce."
Now we have to ask ourselves, "Have the last five months been one big dead cat bounce?"
Back in March, most investors would have told you they thought it would take the stock market a long time to recover from the swift and drastic drop caused by COVID-19.
A common phrase used by analysts was that it would likely be a "W-shaped" recovery.
They thought it would take a year or two along a bumpy road before stocks were able to get back to the previous all-time highs reached in February.
But instead, most stocks have experienced more of a "V-shaped" recovery, quickly rebounding to new record highs just five months later by August.
Over the course of those five months, it was a little bumpy. But for the most part, volatility steadily dropped as stocks steadily rose.
That was, until the end of last week... and the beginning of this week.
Volatility returned to the markets as the VIX spiked 38.5% and the S&P 500 experienced a 7% decline.
With the economy still struggling, investors are wondering if this is the start of another stock market crash.
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But it could also be just a bit of "fat trimming" in a longer-term bull market poised to go higher.
Here's everything you need to know now...
The Fed Has Our Backs
We're not predicting a stock market crash. There's simply too much support behind the markets after the crash in March.
If there's one thing that couldn't be clearer, it's that U.S. President Donald Trump and the U.S. Federal Reserve are going to do everything in their power to push the stock market higher.
It's an election year here in the United States, and Trump lends much of his credibility to how well the stock market is doing.
So, he's incentivized to do everything in his power to help U.S. stocks reach a new all-time high come November because the No. 1 thing people vote with is their pocketbooks.
As for the Fed - it has two main tools at its disposal to keep stocks higher. Jerome Powell used both back in March, and it worked. So, it would be logical to assume the Fed will use them both again in case of future market turbulence.
First, it can print money. The Fed printed about $5 trillion to bail out companies of all sizes, purchase distressed corporate bonds, and even sent cash directly out to individuals in the form of $1,200 stimulus checks.
Second, it can lower interest rates. The Fed lowered rates from about 1.5% to 0% in one fell swoop back in March.
And it's not out of the realm of possibility for the Fed to push rates into negative territory.
In fact, the market participants began pricing in the possibility of negative interest rates here in the United States for the first time ever back in May.
While negative interest rates may sound like a bad thing on the surface, just know that many countries around the world are doing it, and their stock markets are just fine.
Some examples include Switzerland, Denmark, and Japan.
The logic behind lowering rates on bonds is that all stocks will be more attractive by comparison.
Even for a company like Berkshire Hathaway Inc. (NYSE: BRK.A), which doesn't pay a dividend, getting 0% on BRK.A is better than getting -1% on a government bond.
Negative interest rates also incentive people to take on more debt, which can be used to purchase a variety of assets like houses, cars, and even stocks.
Of course, that doesn't mean a stock market crash is impossible, and new events or changes could turn a correction into a crash in a hurry.
That's why it makes sense to have a plan...
What to Do If a Market Crash Happens
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If the stock market tumbles another 13% from here for a 20% correction, we think that's the best time to start scooping up more of your favorite stocks on sale.
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So, you should do the same for your favorite stocks. Some of ours include BABA, ADBE, LLY, STZ, MSFT, FB, and AAPL.
For a full analysis on our favorite stocks to buy, click here.
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