Stock market crash 2 is probably coming, but is not reflected in current share prices. There is no need to panic – I’ll explain why it is so and what I would do now.
Reasons for stock market crash 2
Even though the UK’s economy is opening up, it could still face the economic consequences of the lockdown for a long time. Some industries, such as airlines, might even take several years to recover. Some smaller businesses might go bankrupt in the near term. And it might take quite a while for the employees that used to work for those small businesses to find jobs. All this will have a prolonged negative effect on consumer demand, a key driver of economic growth.
Then, a second wave of Covid-19 is highly likely. If it happens, the UK economy might go through a prolonged lockdown again. This will probably worsen already poor economic conditions.
Moreover, the Covid-19 pandemic has led to deteriorating relations between the US and China. Trade tensions between these two countries started back in early 2018. Before the coronavirus pandemic, the issues were all about tariffs. Now some countries are thinking of seeking compensation from China for covering up information about the spread of the coronavirus.
Finally, there are risks of a hard Brexit. It is probably the most important threat for FTSE 100 companies and their shareholders. It seems to me that everyone has forgotten that the likelihood of a hard Brexit is high. The UK government appears to be unwilling to agree to any extension beyond the end of 2020. So, if no significant breakthrough is reached before the deadline, there will probably be a hard Brexit.
All these factors could lead to stock market crash 2. And the recent FTSE 100 rebound could just simply be a bear market rally, a rally before the second part of the crash. We should remember that bear market rallies have happened in the past and it might take a long time for stock indexes to recover.
But they will eventually recover.
Here’s what I’d do now
The most important things I’d do now is to invest for the long term when shares appear cheap enough. I know it is easy to say but hard to do. Psychologically, many people become greedy when they should be fearful and vice versa. You should be prepared for the market crashing and ready to take advantage of the situation.
In order to do so, you have to keep some spare cash available to invest. I wouldn’t spend my entire savings to buy shares now. Instead, I’d spend a small amount of money to buy stock in undervalued companies.
Investors should always remember that ‘good’ companies with a future usually recover and flourish even after awful recessions. So, choosing the ‘right’ stocks is essential.
My colleague Jonathan came up with a very good idea of investing in large UK-focused Footsie companies. It would protect investors’ money when global economic risks linger. However, this is just one strategy. You could retire early in spite of all the risks mentioned above even if you buy international companies, as long as they are large and profitable.
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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.