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Stock market crash: will share prices recover?

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Amid the devastation of Covid-19 and the subsequent stock market crash, we’ve now started to hear about ‘green shoots’ of hope. Spain and Italy – the two European countries most affected by the virus – have both now consistently reported falling numbers of daily new cases and deaths.

Both Spain and Italy are widely considered to be further along the outbreak curve than the UK. As such, they serve as benchmarks as to what the UK’s trajectory will look like. From this, it appears the virus in the UK will reach its peak this week. This brings a renewed sense of optimism.

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There is even hope that containment measures may be eased back as early as the start of May. Obviously, this is good news. In an ideal world, everything would then go back to normal, and share prices would recover to levels seen before the stock market crash.

Not so fast

However, I believe that we still need to exercise caution when it comes to investing in stocks right now. As far as I can see, there are still downside risks.

What started as a health crisis and led to the stock market crash, is now in danger of turning into a larger humanitarian and economic crisis, with big implications. Pictures from India and from refugee camps around the world have reinforced just how devastating this could be for those less developed nations that aren’t able to provide safety nets.

Social distancing measures are likely to be in force, in some capacity, for months to come. There may be a period during which we loosen containment measures, only to reinforce them later on, if cases being to surge again.

What about the economy?

The longer this goes on, the more people are going to lose their jobs and the more businesses will fail. All around the world, incomes will fall and economic activity will be supressed.

Economic commentators have gone from debating whether or not there will be a recession, to questioning what kind of economic recovery there will be. Whether there will be V-, U-, or L-shaped recovery, will to a large extent determine the performance of the stock market in the short and medium term. Basically, the longer the recession and subsequent recovery, the bigger the impact on the stock market.

But that doesn’t mean that we shouldn’t be investing in stocks. I still strongly believe that now is a good time to invest, for those with long investment horizons. It’s just that there could be some bumps along the way, particularly in the short term.

With that in mind, it’s important that we only invest in quality companies, the kind we are happy owning for an indefinite period. We shouldn’t just be buying shares because they have lost value in the stock market crash. Instead, we should be buying them because we believe they will grow to become bigger, stronger, more profitable businesses than they are today. And if that comes to fruition, then its almost certain that our investments will perform well in the long term.

In times like these, it’s important to be hopeful. But as investors, we also need to be careful too.

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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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