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Stock market crash 2.0: I think a perfect storm is brewing

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This year’s stock market crash caught many investors by surprise. From the end of February to the middle of March, the FTSE 100 lost a third of its value.

Some of the index’s constituents suffered an even more gut-wrenching decline. For example, shares in British Airways owner, IAG, lost more than 70% of their value in just a few weeks, (although I think this could be a good opportunity for long-term investors).

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Still, since reaching a low of 4,994 on 23 March, the FTSE 100 has staged a modest recovery. It is up around 20% from the lows. This technically means we’re back in a bull market. 

However, despite this performance, risks are mounting. And there is an increasing chance investors could face another stock market crash later this year or in 2021. 

Stock market crash on the horizon

I think there is a perfect storm brewing for investors. In recent weeks, stock markets around the world have rallied on the back of improving economic data, and positive updates from coronavirus vaccine trials.

To an extent, this performance is detached from reality. The economy may have recovered modestly over the past few months, but even the most optimistic forecasts suggest it will be several years before it returns to 2019 levels. 

On top of this, a second wave of coronavirus remains a genuine threat. Companies survived the first wave by borrowing vast amounts of money, but this may not be possible the second time around. 

As such, I think investors are facing a wall of risks. Stocks seem to have got ahead of themselves. Despite the uncertain economic outlook, some shares are even trading above the levels at which they started the year. That is unlikely to be sustainable if the country is forced into another lockdown. 

Focus on the long term

I believe the best way for investors to navigate this situation is to focus on the long term.

The problem is, we don’t know what the future holds. There might be another stock market crash later this year or in 2021, but that’s not a given. Markets may continue to push higher. 

By focusing on high-quality stocks with strong balance sheets and competitive advantages, investors can have the best of both worlds. Shares in these companies may produce high total returns in the near term if markets continue to rally. On the other hand, in the event of another stock market crash, they could be a good safe haven. 

Over the long run, these companies are likely to outperform. That’s what makes them such good holdings in my view.

Some examples include Unilever, Halma and Experian. All of these companies managed to navigate the first wave of coronavirus quite successfully. That suggests they will be able to do the same the second time around. 

As such, it may be sensible for investors to seek safety in these high-quality businesses ahead of another potential stock market crash. 

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Rupert Hargreaves owns shares in Unilever. The Motley Fool UK has recommended Experian, Halma, and Unilever. 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.

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