I wish I am wrong this time in my prediction of a stock market perfect storm.
In May 2019, I accurately predicted an imminent stock market crash. A year later, during the market crash of 2020, I also rightly predicted the massive stock market bull run. At this juncture, the stock market risk is simply too high to be ignored. There are at least 3 high-risk events at our doorstep, so I have to call it out quickly.
#1 Clear & Present Danger Of Inflation
Globally, many raw material prices are escalating. There is a serious semiconductor supply shortage induced by the huge spike in car demand. This shortage will lead to shortages in other electronics consumer goods, including iPhones, iPads, refrigerators, washing machines and air conditioners. There is also a shortfall of inventories of other materials such as steel, lumber and cotton. The Bloomberg Commodity Spot Index, which tracks 23 raw materials, has risen to its highest level in almost a decade. Many companies such as Xiaomi, Nestle SA, Colgate-Palmolive Co, Procter & Gamble, Whirlpool have all signalled that they would raise or have already increased prices. The US Labor Department reported the Consumer Price Index (CPI) has jumped 4.2% in April, the fastest jump in more than a decade. Even legendary investor Warren Buffett recently also called out that his businesses are seeing “very substantial inflation”.
Here in Singapore, there is a severe shortage of foreign workers in the midst of a clampdown in foreign workers’ arrival from high-risk countries like India, Bangladesh and Nepal. The wait for Build-To-Order (BTO) HDB flats has now increased to up to 6 years. Many newlyweds cannot afford to wait and thus, have jumped to purchase resale flats. Together with the increased work-from-home arrangement (WFH), real estate prices are soaring, a phenomenon that we anticipated late last year. Many other sectors that require foreign workers will similarly experience such cost increases. These will have spillover inflationary pressure across the country.
Read Also: 5 Reasons Why Singapore’s Property Market Is Heading For A Bull Run
Sustained Inflation often compels central banks to increase interest rates to reduce demand pressure. Unfortunately, this would drive stocks and bond prices down. The US Federal Reserve is playing down the inflationary fears, maintaining that any inflation would be transient. However, the stock and the bond markets did not seem to buy the Fed’s optimism. Bond markets have crashed tremendously over the months and stock were also hit badly for the last two weeks. Interest rate hikes would hit high tech growth stocks particularly hard. From the peak of their share prices, Tesla has fallen by -33%, Apple -12%, Square -25%. Nasdaq collectively has fallen by 5% from its peak. This could be just the beginning of a stock market hit.
#2 A Massive COVID-Variant Outbreak
The India COVID outbreak is of a catastrophic scale. Daily new infections are at a high of over 400,000 cases a day and official hospital death counts are over 4,000 each day. Unofficial death counts are rumoured to be 3 to 5 times higher than the official counts as hospitals could no longer accommodate more patients due to lack of oxygen and other equipment. The culprit is the COVID variant B1617, purportedly more transmissible and equally or more lethal than the original strain.
Even Singapore and Taiwan, who maintain the global gold standard of managing the infection cases locally, could not stop this strain from spreading in their community. It is very likely that the B1617 virus will be the globally dominant variant in the very near future. In an act of, what I think is premature, US President Biden has announced that vaccinated individuals will no longer be required to wear masks in public. The UK, Spain and many European countries have just lifted their lockdowns, and crowds are seen celebrating in the streets, many without masks.
The original COVID-19 strain started its outbreak in Asia in early 2020, and it travelled to Europe and US subsequently. I fear that history will repeat again with the B1617 variant. The only way to stop this outbreak again would be a wide-scale vaccination. However, apart from the US and UK, major economic blocs have very low vaccination levels. I believe a massive outbreak worldwide will happen again that would warrant draconian lockdown and social distancing measures. This would likely cause severe financial turbulence in the markets and disruptions in supply chains leading to more inflationary pressure.
#3 Escalation Of Israel’s Conflict With The Palestinians Into A Middle East War
Israel’s domestic riots between the Arabs and Jewish Israeli have escalated to a conflict between Hamas in Gaza and Israel. As of 16 May 2021, Hamas has fired over 2500 rockets into Israel and Israel has retaliated with many airstrikes. As a country with superior weaponry and military, Israel has succeeded in destroying many buildings (allegedly used by militants) in Gaza. Many Palestinian lives have been lost and many civilians made to flee their homes in Gaza.
The scale of destruction is many times against the Palestinians, and this would likely invoke the wrath of neighbouring Arab countries such as Lebanon and Syria, and possibly Iran as well. Border skirmishes have broken out with Lebanon, and rockets are being fired now from Syria at Israel. If this conflict escalates further, dragging more countries in, it could result in an all-out Middle East war which could cause oil prices to hike and destabilise the global economy. This could have massive financial market repercussions.
Even if we have just one of these events occurring, it would be sufficient to cause significant stock market turbulence. If all 3 events would occur concurrently, there would be economic implications and massive stock market volatility.
What Do We Do In Face Of A Risk Of Such A Perfect Storm?
The natural instinct would be to sell and run from the stock market. However, stock market experts would tell you time in the market is more important than timing the market, so I would personally ride it out. This is because I am holding mainly assets (such as the S&P500 or equivalent global ETFs) that have proven to stand the test of time across different economic impacts and eventually recovers and continue to compound powerfully over time.
I would personally keep out of high-risk speculative investments such as cryptocurrencies, leveraged instruments and speculative tech counters. Most importantly, prepare yourself psychologically for a possible wide rollercoaster ride – an anticipated event is not as scary as something that was unexpected. There would likely be great buying opportunities in times of significant volatility. No matter what the economic shocks may be, the S&P500 index eventually recovers and compounds strongly over a long time.
The storm will eventually pass, and sunshine will always return.
We delve deeper into Loo Cheng Chuan’s thoughts on the stock market outlook today, shared the poll results from our Telegram followers and discuss the risk of inflation on the stock market. Watch our discussion with Loo Cheng Chuan here.
Loo Cheng Chuan, is the Founder of the 1M65 Movement. He developed the 1M65 & 4M65 CPF investment strategy that is helping many Singaporean couples to become millionaires at retirement. He runs a 1M65 Telegram Group where he regularly coaches passionate 1M65 enthusiasts on good personal finance virtues and financial market analysis. Loo and Kate (his very comical daughter) also have an entertaining 1M65 Youtube video channel.
Watch our discussion with Loo Cheng Chuan on 1M65 here.
