Stock market crash round 2 may be coming. Here’s what I’m doing now!

This Fool suspects the recent bounce in the equities could prove temporary. Here’s what he’s doing to prepare for a second market crash.

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The bounce seen in equities over the last couple of months has soothed investors’ nerves after March’s bloodbath. Today however, I’ll explain why I’m not getting comfortable just yet. I’ll also say what I’m doing to prepare for a (possible) re-run of the market crash.

Support can’t last

Chancellor Rishi Sunak has been praised by many for the swift response to the damage wrought by the pandemic by introducing the furlough scheme. Mortgage ‘holidays’ have also provided people with some breathing space to reassess their finances.

Clearly however, there’s a limit on how long this arrangement can continue. As such, unemployment levels look set to get grow significantly in the rest of 2020 as businesses learn the full costs of the pandemic on trading. 

It seems realistic rather than overly negative to say that some parts of the economy will take a lot longer to recover than others. Some may struggle to recover at all. 

Second wave?

The gradual lifting of lockdown restrictions has been welcomed by some, criticised by others.

Regardless of where you stand, the current lack of vaccine means there’s is at least a chance of countries being hit with a second wave of the virus . We just don’t know how big that probability is.

Even if a big second wave isn’t forthcoming, I still have difficulty believing that the economy will spring back to life fast. Yes, there might be an initial surge in activity as people ‘let off steam’, but a looming recession and social distancing restrictions make it likely that consumer spending is unlikely to go back to normal.  The psychological wounds inflicted by the coronavirus won’t heal overnight. 

Murky earnings outlook

Stocks may have recovered from March’s market crash but many companies are still unable/unwilling to provide any kind of guidance on earnings for the rest of 2020.

This makes valuing a business somewhat tricky. We know what shares are trading at, but we don’t know how fair these prices are. This, of course, doesn’t stop analysts from speculating. 

The question to ask is whether estimates are likely to be hit. If current projections prove too optimistic (even after taking into account the impact of the virus), expect share prices to be walloped. 

Market crash 2.0

If all this sounds very negative, don’t despair! There are things you can do now to prepare for the possibility that markets might fall again.  

Chief among these is checking that you’re still happy with anything you already own. Holding companies with healthy balance sheets is more important than ever, in my opinion, and anything I own with debt is receiving extra scrutiny these days.

Second, I’ve built up a decent cash position to capitalise on any big drops in coveted quality stocks. One of the worst things in investing is not that markets fall, it’s having no dry powder to take advantage when they do!

That said, holding too much cash for too long should still be avoided. This is why — third —  I’m continuing to buy stocks where I think some of this risk is already priced-in or where the long-term outlook for a company or sector remains bright. 

Finally, I’m limiting my news consumption. Keeping some distance, at least during trading hours, should help avoid any emotional buying or selling.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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