If you missed the 2020 stock market crash, you could soon have an unprecedented opportunity to try again.
Cast your mind back to mid-March. Shock and fear was everywhere, Covid-19 was on the rise and the number of infections was spiking. Investors panicked, selling everything at any price.
It precipitated the fastest stock market crash in 33 years.
Then, the inevitable happened. The FTSE 100 found a bottom at 4,993 on Tuesday 23 March and stocks began to rise again. How could this be? Didn’t people know we were in the middle of the worst global pandemic for 100 years?
This proves to us that short-term sentiment shifts can produce buying opportunities for investors. And historically, buying bargain shares that recover over time can produce relatively high returns.
Stock market crash returns?
A second stock market crash could be just as severe, because investor confidence is so fragile right now. If that happens, it is likely to produce the same disconnect between current share prices and long-term valuations in the FTSE 100 and FTSE 250.
All talk recently has been of recovery and reopening. The UK, for example, has sanctioned the reopening of pubs and bars on 4 July.
But the risk of a second wave of the pandemic has put many the US states that reopened soonest on high alert and Leicester in the UK is facing a second, local lockdown.
Potential new restrictions on business reopening could further hurt economic growth in the short term.
The IMF is already projecting global economic growth at minus 4.9% in 2020 and many major economies face deep recessions.
Second wave
Now Covid-19 infections have passed the grim milestone of 10 million worldwide.
And the head of the World Health Organisation Tedros Adhanom Ghebreyesus, paints a bleak picture. “Although many countries have made some progress, globally the pandemic is actually speeding up,” he said in a 29 June briefing. “The worst is yet to come. I’m sorry to say that,” he added.
That puts a kibosh on the idea that countries can open up their economies trouble-free while cases are still rising.
US states that opened bars, restaurants and beaches early — California, Arizona and Texas for example — are now having to go back into lockdown.
And the FTSE 100 tends to follow the lead of US stock markets. So a second stock market crash could be just around the corner.
Sensible moves
A stock market crash is never a good thing for today. But for investors who can put up with weak prices in the short term, it does produce a raft of new possibilities.
As famed value investor Shelby Davis once said: “You make most of your money in a bear market, you just don’t realise it at the time.”
Remember that share prices are not the same thing as company value. So by choosing quality companies facing short-term weakness, investors can make far greater long-term gains than would be possible normally.
In my opinion investors should focus only on the strongest FTSE 100 and FTSE 250 companies, those that are best placed to weather the economic storm. That means choosing market leaders with the financial firepower to survive a period of slowing growth and to thrive afterwards.
