The threat of a second stock market crash in 2020 has been hanging in the air for a while.
Maybe it will arrive when the market realises how difficult it has become for economies to make progress in a world where Covid-19 is still out there. Or perhaps a second wave of the virus really will bubble up worldwide and cause another plunge in the markets.
How a second stock market crash may develop
It’s unlikely that the stock market has failed to noticed the recession. My guess is stocks have already factored it in. Indeed, the stock market tends to look months ahead. So the rebound we’ve seen in shares since the spring probably accounts for much of the recovery in the economy we’re seeing now. Since the lockdowns began to lift, business operations are bouncing back in many cases.
However, we are seeing local flare-ups of the coronavirus. And in some geographies, it seems to be running wild. In the UK, we’ve seen hotspots such as in Leicester. Meanwhile, many businesses are up and running again. But it’s emerging that revenues and profits will be lower while the pandemic persists, and costs will be higher.
In some cases, the rally we’ve seen since the spring appears to be running out of steam. For example, cyclicals such as banking shares Barclays and Lloyds appear to be curling down again. As do housebuilders like Taylor Wimpey and Vistry. My guess is the weakness in those stocks is down to rising worries about Covid-19 infections.
But shares like these tend to follow the ups and downs of the general market. As such they’re not necessarily the best ones to research now. There’s still plenty of opportunity in the market. And weakness in the general stock market is just the kind of environment that super-investor Warren Buffett has favoured for stock shopping in the past.
Shares on sale
There are good reasons for that. When the market is lower because of poor sentiment and economic worries, high-quality businesses can see their shares pulled down too. They often fall alongside weaker operators such as the cyclicals I’ve mentioned. And when that happens, there’s a good chance of buying shares while they’re assigning a lower valuation to the underlying businesses.
So, I won’t be put off if a second stock market crash arrives in 2020. Instead, I’ll view it in the same way I’d look at a shop running a sale. Indeed, when top-quality merchandise has been marked down, that’s the time to go shopping. And that applies to shares as well as goods.
But Buffett rarely buys just any old share. He’s looking for alpha. In other words, he wants the shares of outstanding businesses capable of moving higher than the general stock market because of underlying operational progress in the business. And his guiding star is ‘quality’. He buys good-quality businesses as cheaply as he can and holds them for a long time.
I reckon following Buffett’s strategy can help anyone to invest their way to a million. And a second stock market crash would be a good place to start.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. 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.