Does a tech stock sell-off in the US mean we’re facing stock market crash number 2?

As volatility hits the markets again, should we brace for stock market crash number two or this an opportunity? Here’s what I think and why.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Weakness has hit the US stock market this week. Big fallers include popular tech stocks such as Apple, Tesla, Netflix and Microsoft. Through the summer, such titans behaved like a licence to print money for investors, but the market is taking some of those gains back now.

Is stock market crash number two about to hit?

What does this all mean for investors in the UK? Are we about to see a second stock market crash to rival the one in the spring? I don’t think so, even though it’s true that the London market tends to follow the moves of the US market, at least in the short term. And that particularly applies to down-moves!

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But there are some factors in the US that don’t apply in the UK. For example, tech stock valuations became stretched, powered by investors apparently following the momentum trade. It’s only natural for some of that froth to blow off from time to time. We don’t have those kinds of over-valuations in major big-cap shares in the UK. And the US faces a presidential election soon. It’s not uncommon for the stock market to become volatile in the run-up to such events.

But it’s fair to say we have a few uncertainties of our own to contend with. One is Boris Johnson’s deadline imposed on the European Union for a breakthrough in Free Trade Agreement talks by the time of the European Council on 15 October. Without that progress, the UK looks set to terminate the transition period with just World Trade Organization (WTO) terms in place, recently rebranded as an Australian-style agreement. Whereas I don’t believe such arrangements will materially harm the UK’s prospects, it could spook the markets for a while.

Be prepared

But will any of this lead to another FTSE 100 stock market crash close to the 50% we saw in the spring? I doubt it. But I wouldn’t rule out further volatility and a significant correction of as much as 10% or 20%. Only time will tell. And it’s all just par for the course when it comes to investing anyway. There’s always something to worry about and that’s why we often hear people say the stock market climbs a wall of worry.

So what’s the best way to handle this volatility? I reckon the first step is to keep a relevant watch list up to date. If you’ve done the research and due diligence, you’ll be well prepared when the market offers the opportunity to buy shares of the great companies you’ve selected at better prices.

Think of it as you think of shopping in the sales. Normally we cheer lower prices when buying quality goods and that’s a good way to behave when buying quality shares. Such an approach has made investor Warren Buffett billions, for example. I don’t believe we’ll see stock market crash number two during 2020, but we could see another opportunity pick up quality shares on the cheap. Will you be ready?

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Kevin Godbold does not own shares in any company mentioned. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Apple, Microsoft, Netflix, and Tesla and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. 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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