A stock market crash is one of the worst fears of any investor.

With the ongoing COVID-19 crisis, the stock markets around the world should, ideally, behave in-line with lower quarterly earnings and shrinking revenues.

But the situation is far from what is expected. Instead, global stock markets are recovering rapidly, nearing their peak levels.

Several experts, including the likes of Jeremy Grantham, have warned investors of a stock market bubble in the making.

Let’s find out what’s pushing the markets forward.

No correlation between the stock market and the economy

According to the latest IMF report, the Real GDP of the European economy is down 40% in the second quarter of 2020, with over 54 million jobs being saved by the fiscal stimulus and government policies.

Several governments across Europe have expanded their job-retention program to supplement 70% to 80% of the non-working hours for workers.

Similarly, businesses are provided tax deferrals, direct equity support, and loan guarantees to stay afloat during the ongoing crisis.

Despite struggling industries and enterprises standing at the brink of mass bankruptcies, stock markets are witnessing unprecedented growth.

In July itself, Stoxx 600 was marginally ahead of the S&P 500, a rare feat for the Eurozone.

Understanding factors that may burst the stock market bubble

Market correction post subdued economic indicators

One of the factors that may burst the stock market bubble is a string of subdued economic indicators or matrices, hinting towards a vast disconnect between the stock market growth and the real economy.

Jeremy Grantham reveals that there hasn’t been such a wide difference between real economy GDP and the paper world of stocks and P/E ratios.

Fiscal stimulus package withdrawal

The IMF marks the response of nations against COVID-19 induced sluggishness as unprecedented.

Most countries have extended their worker-support programs, eased monetary policies for banks to promote lending, and offered tax breaks, credit facilities to businesses.

As governments withdraw support packages and industries transition into their conventional financial procedures, it is bound to add some economic pressure across various sectors.

It can trigger a stock market bubble burst or negative sentiment amid weakening business balance sheets.

The second wave of COVID-19

Europe is witnessing a second wave of COVID-19 infection, with the European Union (along with the UK) reporting 45,000 plus cases daily, as per the records of the European Centre for Disease Prevention and Control (ECDC).

If the second wave continues its havoc in a similar manner, we may very well witness a stock market bubble burst led by growing cases.

As stock markets regain their lost momentum without a recovery in the real world (GDP), the chances of a recession, or a stock market bubble burst, are looming on most economies.

It’s the right time to diversify investments to prevent extensive damage to your investment portfolio.

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