The FTSE 100 may have rebounded from its 2020 low, but the prospect of a second market crash could persist over the coming months. Risks continue to face the world economy’s growth prospects. Investor sentiment could also weaken if expectations regarding a recovery fail to be met.
Despite this, now could be an opportunity to buy cheap large-cap shares in an ISA for the long run. In many cases, their current valuations suggest that they offer wide margins of safety. And with the unpredictability of stock market’s performance, long-term investors may wish to take advantage of low valuations while they’re still on offer.
A second market crash
A second FTSE 100 stock market crash would not come as a major surprise to many investors. Although lockdown measures have started to be eased, there’s no guarantee the coronavirus will be contained over the coming months. Therefore, the operating environment for many businesses may continue to be challenging. This could cause investor sentiment to weaken and share prices to fall.
Furthermore, the UK and US economies may be impacted by political risks over the next six months. The US election and Brexit could weigh on investor sentiment. Those events could represent change that causes investors to readjust their forecasts. As such, share prices could fail to take into account an increasingly uncertain outlook for the world economy.
Buying FTSE 100 shares today
Despite the risks facing the FTSE 100, buying high-quality stocks in an ISA today could be a profitable move over the long run. In many cases, the stock market’s valuations reflect a forecast sustained period of weak growth for many companies. And, while the index itself may have rebounded from its March lows, a significant number of its members continue to trade at exceptionally low price levels. Indeed, they’re levels that haven’t been seen for many years.
Therefore, with the stock market’s prospects being unpredictable, buying stocks today and holding them for the long run could be a shrewd move. Although there’s the potential for a second market crash, there’s also a chance the stock market will deliver further growth and will fail to return to the low price levels it posted earlier in the year.
Buying high-quality stocks
Of course, buying FTSE 100 stocks that can survive short-term challenges could be vital to any long-term investor’s success. If a company cannot overcome difficult operating conditions due to a weak balance sheet, for example, it will fail to benefit from the index’s likely long-term recovery.
Therefore, focusing your capital on the strongest businesses in a sector could improve your risk/reward opportunity. This may boost your chances of surviving a second market crash, as well as allowing you to take advantage of the index’s next sustained bull market.
Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.