The uncertain economic outlook caused by coronavirus may not make today appear to be the best investment opportunity in a decade. After all, it is likely that many businesses will experience a period of lower profitability that negatively impacts on investor sentiment.
However, with policymakers across the world having announced major stimulus programs, an economic recovery could be ahead in the coming years. As such, the stock market could deliver a strong recovery from its low valuation – just as it did following the global financial crisis over ten years ago.
The scale of the economic challenges posed by lockdowns over recent months has prompted policymakers to introduce major stimulus packages. For example, the United States Federal Reserve has slashed interest rates to zero and introduced an ‘unlimited’ quantitative easing program.
Together, these policies create additional liquidity for businesses and encourage spending rather than saving. They could help to stimulate the world’s largest economy, while similar policies announced across other countries could also improve the outlook for global GDP growth in the coming years.
Similar policies, albeit on a smaller scale, were introduced during the global financial crisis. They had a positive impact on asset prices, and sparked a bull market that lasted for over a decade. As such, the outlook for the stock market could be much more positive than recent corporate earnings and economic data suggests.
At the present time, many companies trade on low valuations. This is unsurprising, since a wide range of sectors are currently experiencing highly challenging trading conditions that are causing a severe decline in sales and profitability.
It may seem unlikely that valuations across the stock market will recover, due to an uncertain outlook. This feeling was also present during the global financial crisis, as well as in the midst of previous economic crises. However, the best investment opportunities have often occurred when the economic outlook is at its most precarious. Valuations are at their lowest ebb at such times, and investors can access wide margins of safety.
Clearly, it is not possible to know that valuations are at their lowest ebb at the present time. But many companies currently offer wide margins of safety that are unlikely to persist over the long run. As such, taking advantage of low valuations today could be a shrewd move.
A volatile recovery
Of course, the stock market is very unlikely to experience a smooth or fast recovery. It can take many years for stock prices to return to their previous highs, and investor sentiment can be highly volatile in the meantime.
However, investors who are able to buy stocks today and hold them for a prolonged period of time may generate high returns. The stock market’s track record of recovery from its deepest declines and vast stimulus packages recently introduced mean that now could be the best investment opportunity since the last global downturn over a decade ago.
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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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