Back in March, when the stock market crashed, I looked at whether it was a good time to invest. At the time, fear levels were off the charts and many valuations were extremely low, which is generally a good combination when you’re looking to invest in stocks. As a result, I said that it could be a good time to invest.
Since that article, the stock market has enjoyed a spectacular run. Since its March lows, the FTSE 100 index is up about 30%. Meanwhile, the main US stock market index, the S&P 500, is up around 40%. These are huge gains when you consider the current economic environment, which looks extremely fragile due to the coronavirus. This begs the question, is it still a good time to buy shares?
Is now a good time to invest?
Looking at stock valuations right now, the near-term risk/reward proposition offered by the stock market does not look quite as attractive as it did in March, in my view.
Many of the amazing bargains that appeared in March are now gone. For example, ASOS shares, which were trading under 1,000p at one stage in March, have risen to near 3,500p. Similarly, JD Sports shares, which were under 300p at one point in March, are now trading near 650p.
Meanwhile, economic uncertainty remains extremely elevated. For example, the UK economy shrank by a record 20.4% in April. According to the Bank of England, we could be looking at the biggest economic slump in over 300 years. In the US, over 40m people have filed for unemployment recently. That’s certainly concerning.
This doesn’t necessarily mean that it is not a good moment to invest in stocks though. In the short term, the stock market is highly unpredictable. With central banks throwing unprecedented amounts of stimulus at the global economy, stocks could easily keep rising.
Investing in the right stocks
One thing I will say is that if you are keen to invest right now, I think it’s crucial that you’re selective about your investments. Not all stocks are likely to generate good returns for investors going forward. In the current environment, where there’s an enormous amount of economic uncertainty due to Covid-19, it’s important to invest in the right kinds of companies.
What do I mean by the right kind of companies? Well, I’m talking about companies that:
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Are highly resilient
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Are not at risk of going bankrupt due to Covid-19
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Have strong growth prospects in a post-Covid-19, digital world
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Are not trading at super-high valuations
These are the kinds of companies I’d invest in today. Such companies should be able to weather the near-term economic uncertainty associated with Covid-19 and deliver healthy returns for investors in the long run.
I’d also think long term. In the near term, the stock market could continue to be volatile. This volatility could impact even the very best stocks.
However, in the long run, high-quality stocks that have the attributes I’ve mentioned above should deliver strong returns for investors.
