When investors are looking one way, the stock market often goes the other! And right now, many people are focused on the possibility of a second stock market crash in 2020. However, I reckon there’s a strong possibility we could enter a new bull market for shares soon.
Why I’d forget about a stock market crash
I think it’s encouraging that a couple of worrying economic events have almost finished and the uncertainty is receding. Indeed, the Free Trade Agreement negotiations between the UK and the EU have nearly timed-out. And the US presidential election drama is almost over. In both cases, the biggest gain is that there will be more clarity ahead. And the stock market likes that.
But the coronavirus crisis rumbles on. The UK’s Chancellor of the Exchequer, Rishi Sunak, recently announced an extension of the government’s costly furlough scheme until the end of March 2021. The scheme aims to provide 80% of the pay for workers who have been temporarily laid-off. And on top of that, Sunak promised billions of pounds in other job support measures.
Sunak said in the house of commons on Thursday that the government’s extensive borrowing to pay for it all “is not a sustainable situation.” And, “as we continue to recover and grow, we will have to make sure that we reduce our structural deficit over time in line with the recommendations from the IMF.” And I reckon many investors will take these remarks as another thing to worry about regarding the stock market.
Indeed, one way for governments to try to balance the books is through fiscal policy. And the big worry is that government spending will reduce and taxation will rise in the years ahead. But I reckon there’s a third way that could help to sort out the UK’s debt problem and boost the stock market at the same time.
Why I’m buying high-quality investments right now
Indeed, one of the best ways for governments to reduce a budget deficit (where spending exceeds revenue) is to promote economic growth. If the economy grows, tax revenue will likely increase without raising taxes. So, if growth is the goal, there’s an incentive for the government to keep taxes lower, interest rates down, and spending higher.
And if government policy is aimed at stimulating economic growth, businesses will likely benefit, recover and grow. Indeed, if that happens, we could be on the cusp of a new bull market for shares that could endure for many years. So, I’m buying the shares of high-quality companies and carefully selected funds right now while they offer good value.
For example, I think there’s a good opportunity in shares backed by defensive, cash-generating businesses today. I like the look of names such as Unilever, Smith & Nephew, Sage, Reckitt Benckiser and Diageo. And the cyclical sectors look depressed such as housebuilders and banks. Shares in sectors like those could do well when economic recovery gains traction.
