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Stock market crash part 2: why investor fear could create buying opportunities

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There’s a very real threat a second stock market crash will take place in the coming months. Risks such as heightened political uncertainty in Europe and North America, the ongoing coronavirus pandemic and a challenging economic outlook could weigh on the prospects for a wide range of businesses over the near term.

However, the existence of such a threat could create buying opportunities for long-term investors. Many stocks appear to be undervalued at the present time. This may mean they offer recovery potential as the economic outlook gradually improves.

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A second stock market crash

There’s always the potential for a stock market crash to take place. Indeed, they’ve previously occurred without prior warning on many occasions.

However at present, it could be argued that a market downturn is more likely than is usually the case. Risks such as heightened political uncertainty in Europe and North America could act as a drag on investor sentiment. Similarly, the coronavirus pandemic remains a known unknown in terms of its impact on the wider economy. This may prompt weaker investor sentiment over the coming months.

Therefore, the occurrence of a second stock market crash wouldn’t probably be seen as a surprise by many investors. This doesn’t mean it’s guaranteed to take place. However, the threat of a market downturn may mean that the idea of buying stocks becomes less popular among some investors.

Buying opportunities in an uncertain market

The potential for a further stock market crash means that many high-quality companies currently trade at low prices. Certainly, some share prices have recovered from the lows reached earlier this year. However, many other companies continue to have valuations that are significantly below their long-term averages. This suggests that investors are very cautious about their prospects, which could create buying opportunities for their long-term peers.

In some cases, investor caution is warranted. Some companies have weak balance sheets and may fail to benefit from a long-term economic recovery. However, other companies have sound financial positions and are likely to return to positive profit growth over the long run. Such businesses trade at prices that are below their intrinsic values in some cases. This could indicate that they are among the most attractive buying opportunities available at the present time.

A long-term recovery

Of course, some investors may feel there’s no guarantee of a recovery from a stock market crash. While that may be the case, the past performance of indexes such as the S&P 500 and FTSE 100 suggests a return to previous record highs is very likely.

Therefore, investors who build a diverse portfolio of high-quality businesses when they trade at low prices could generate impressive returns. Certainly as the economy recovers and investor sentiment improves.

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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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