The economy’s uncertain outlook could mean a second stock market crash takes place over the coming months. And that would reduce the prices of a wide range of UK shares. In such a scenario, investors may be able to buy cheap shares at even lower prices in the short run.
However, a second downturn for the FTSE 100 and FTSE 250 indexes is by no means guaranteed. The stock market could experience a rally after its recent rebound that pushes valuations higher.
As such, now could be an opportunity to buy high-quality stocks for the long term while they offer bargain status in many cases after the market crash.
A second stock market crash
The prospects for the economy suggest a second stock market crash could occur in the coming months. Rising unemployment and weak consumer sentiment may combine to negatively impact on the financial prospects for many businesses in the FTSE 100, FTSE 250 and wider stock market. In turn, this may cause investor sentiment and share prices to deteriorate.
However, in previous periods of economic difficulties, stock markets have often acted in an illogical manner. For example, the depths of the 2008/09 bear market occurred in March 2009 – even though the UK’s recession lasted until the fourth quarter of 2009.
Therefore, the stock market can be ahead of the economy in terms of its performance. That’s because investors are often looking ahead to the future rather than considering the present. This could mean share prices have the capacity to rise in the second half of 2020 instead of experiencing a market crash – even if the economy’s prospects continue to be downbeat.
Buying cheap UK shares
The fact that a second stock market crash isn’t guaranteed could mean now’s the right time to buy cheap UK shares. In many cases, they trade on low valuations compared to their historic averages. This could mean they offer wide margins of safety that largely factor in the prospects for a major recession this year.
Furthermore, a significant number of FTSE 100 and FTSE 250 shares have solid balance sheets and sound growth strategies. They are, therefore, likely to survive a very challenging period where their operating conditions could lead to slower sales and profit growth. They may also be in relatively strong positions to benefit from a likely return to positive GDP growth over the long run.
Of course, buying cheap UK shares today means investors must accept the risk a second market crash may occur this year. This may cause paper losses for many investors that could be significant in the short run.
However, the low valuations on offer across the FTSE 100 and FTSE 250 suggest that, for long-term investors, now could be an opportune moment to build a diverse ISA portfolio while margins of safety are relatively wide.
