The world economy’s uncertain outlook could prompt a second stock market crash in 2020. Risks such as political challenges in North America, Brexit and the ongoing coronavirus pandemic may contribute to weaker investor sentiment that sends share prices lower.
Furthermore, market declines have taken place fairly frequently in the past. Therefore, planning ahead for their occurrence could be a prudent strategy.
You may be in a strong position to survive a market downturn and prosper from its recovery through buying the best companies at the lowest prices today.
The risk of a second stock market crash
A second stock market crash could realistically occur in the near term. The outlook for the world economy is extremely challenging. That’s despite many stock prices having rebounded following the rapid downturn in global stock markets earlier this year. Rising unemployment in many major economies, weak consumer confidence and poor financial performances from many businesses may cause investors to become increasingly risk-averse.
Furthermore, upcoming events such as the US election and Brexit may affect trading conditions for some businesses and sectors. Alongside this, the coronavirus pandemic is a known unknown that could improve or worsen before the end of the year. Together, these risks may be sufficient to lead to greater selling among investors in the stock market.
Of course, a stock market crash is not a new event. Stock prices have always been volatile at times since their inception. They have frequently been impacted by political, economic and other events that change the prospects of a wide range of businesses and impact significantly on investor sentiment.
Therefore, it is good practice to ensure that your portfolio is always prepared for a potential fall in stock prices. This means that your holdings should not be overvalued. Otherwise, a lack of a margin of safety may mean that they suffer to a greater extent versus those businesses with valuations that factor in the potential for a downturn. Similarly, holding businesses with the financial strength and market position to overcome a period of weaker revenue growth could be a simple means of preparing for an economic downturn.
Capitalising on weak stock market performance
A stock market crash could also present buying opportunities for long-term investors. Cheaper shares can deliver superior capital gains versus the market. As the recent bear market showed, high-quality businesses can have low valuations during a downturn as a result of weak investor sentiment towards the general equity market.
As such, holding some cash in preparation for the next downturn could be a shrewd move. It may mean you can buy stocks at cheaper prices for the long run. This may provide peace of mind ahead of the next downturn in stock prices.
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.