The elation in the stock market of a couple of weeks ago has faded. There’s a nervousness in the air now and increased volatility. Investors are watching the coronavirus figures, and fearing a second wave of the pandemic with more lockdowns and a second stock market crash in 2020.
On top of that, miserable trading figures have been coming through from companies. And the extent of the depth of the recession we face is hitting home.
Preparing for the possibility of a second stock market crash
At least, that’s my read of the situation in the markets right now. And it seems that the stock market indices — led by those in the US – are jumping on every piece of economic news. The market is looking for direction. Last week the S&P 500 and other indices soared because of the story behind headlines like this: “Fed pledges to buy more corporate bonds.”
Indeed, more stimulus from governments is being hailed as a good thing by the market. The other side of the equation is that markets may need more stimulus because the outlook for economies is poor. And I reckon the volatility we are seeing now could be because investor sentiment is bouncing between the two perspectives.
One thing seems clear, the recovery trade has run out of steam. Now the stock market seems to be playing a game of ‘wait and see’. So, what should we do while we are waiting? My suggestion is that we could work hard on our watch lists of great shares that we’d one day like to own.
A second stock market crash in 2020 could be a good opportunity. It would give us a second bite of the cherry but with the added advantage of already knowing what some of the cherries we might pick taste like. Indeed, we’ve seen which shares have delivered the strongest bounce-back recoveries following the crash of the spring.
Finding great underlying businesses
Behind strong stocks, we could find strong businesses. Of course, that’s not always true, and that’s why it’s so important for us to do our own thorough analysis and research before buying any shares. But I reckon it’s a good idea to do that research now and to add to a watch list the stocks backed by the best businesses.
If a second crash arrives, it could pull back down some of those great shares you’ve found. And because you’ve worked hard preparing, you’ll be in a good position to pounce on your favourites. In the process, you could end up buying shares in great businesses at fair valuations – the kind of approach to investing that would make Warren Buffett proud!
We’ve seen strong moves back up from many well-known names following the spring crash. For example, consumer goods company Reckitt Benckiser and pharmaceutical giant AstraZeneca have both come roaring back. So has distribution and services provider Bunzl. All three are backed by decent, cash-generating and defensive businesses.
Meanwhile, in the smaller-cap space, we’ve seen strong moves back up from toilet roll maker Accrol, retailer Dunelm, education products provider RM, power components maker XP Power and data and analytics firm YouGov, to name but a few.
Don’t waste a second stock market crash if it comes. Instead, why not prepare now by building your watch list?
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended XP Power. 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.