A top market expert details how 6 factors that fueled the coronavirus crash will shape the stock market's recovery

Recovery role: Market obstacle

Lofty stock valuations may have contributed to the markets' sharp selling in March, but after just a few months, equities are back to highly expensive levels. The S&P 500's forward price-earnings ratio sat at 23.75 as of Friday afternoon, its highest level since early 2000.

Such a rapid rebound, coupled with ballooning valuations, leaves markets particularly sensitive to a drop in investor optimism. A range of events can trigger a wild run back to safe havens, Shah warned, particularly a repeat of what caused markets to plummet in the first place.

"Markets are once again vulnerable to a negative swing in sentiment — certainly a second wave of infection that results in renewed lockdowns could bring this new bull market to an abrupt end," she said.

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Recovery role: Obstacle-turned-booster

In the early days of the pandemic, Shah flagged that a widespread plunge in corporate credit quality could starve companies of fundraising methods. Once-investment-grade firms would slide into junk status, becoming so-called "fallen angels" unable to shore up cash for riding out a prolonged downturn.

The Federal Reserve shared her concerns. By making an unprecedented move into buying corporate credit, the central bank immediately backstopped credit health. The Fed later expanded its debt-purchasing to include companies that suffered a fall into the high-yield status, further reinforcing its support for firms' ability to raise emergency capital.

These central bank actions also spurred a "follow-the-Fed" attitude among investors. Billions of dollars rushed back into credit markets to take advantage of the policy backstop, allowing firms to issue debt before the Fed's relief program even began operations. Credit-health worries faded and a strong risk-on attitude among investors gave firms the support needed to stay afloat, Shah said.

Recovery role: Market obstacle

The past decade's rise of social media platforms formed "a global echo chamber to major, anxiety-inducing events," Shah said. This trend accelerated the spread of coronavirus fears around the world and, accordingly, "exacerbated a collapse in both investor and household confidence," she added.

Unfortunately for bullish investors, the opposite is unlikely to take place. Investors and the general public alike will run into a great deal of misinformation as the virus threat abates and economies reopen, making the proliferation of social media a strong headwind against a broad market recovery.

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Recovery role: Obstacle

Companies particularly exposed to China and its manufacturing sector bore outsized damage in the early days of the coronavirus outbreak. The fallout eventually spread around the world as supply chains were disrupted and shipping faced new hurdles.

The country has since largely recovered, but still-increasing infection rates in other regions have put off a complete return to past supply-chain efficiency, Shah said. China isn't out of the woods yet either, as revived US-China tensions risk the implementation of new tariffs and another trade conflict.

"Global supply chains mean that the world economy will only be as strong as the weakest link," Shah wrote, adding global growth and markets "may be the ultimate losers."

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