A second stock market crash in 2020 could occur over the coming months. Risks such as a second wave of coronavirus and rising tensions between the United States and China may contribute to weak earnings growth across many industries.
While this may lead to disappointing returns in the short run, it could provide buying opportunities for the long run. Through buying high-quality businesses while they offer wide margins of safety, you could benefit from a likely long-term recovery in stock prices.
A further market crash
Many listed companies have delivered impressive rebounds since the stock market crash earlier in 2020. However, their performances could be negatively impacted by ongoing risks facing the world economy's outlook that may lead to a second downturn for share prices.
Relatively little is still known about coronavirus. As such, it may be too early to say that lockdowns across many major economies will be successful in combatting it. Likewise, even though there was apparent progress in trade talks between the US and China prior to the pandemic, tensions between the two countries could rise. This may cause investor sentiment to come under pressure, which could lead to falling share prices over the near term.
Margin of safety
While a further stock market crash may cause some investors to worry, it could provide long-term investors with an opportunity to buy high-quality companies while they offer wide margins of safety.
Buying a stock at a discount to its intrinsic value may equate to a more attractive risk/reward ratio, since many of the risks it faces may already be priced in. As such, buying undervalued shares could be a means of building a solid portfolio that is well placed to deliver long-term growth as the economy recovers.
During a stock market downturn, there may be a wide range of businesses that appear to offer good value for money. As such, it may be worth assessing their financial strength and being selective about which companies you purchase.
Furthermore, buying a diverse range of stocks could be a shrewd move. It may help to protect your portfolio against challenging trading conditions for specific companies and sectors during what could prove to be a difficult period for the world economy.
Recovery potential
A stock market crash is not an especially unusual event. Stock prices have a track record of experiencing sharp downturns in a short space of time. The key takeaway for investors is that the stock market has always recovered from its bear markets to produce record highs.
Therefore, even if there is a further decline in stock prices over the near term, a recovery is very likely. Through purchasing a range of companies while they offer wide margins of safety, you could generate higher returns in the coming years as investor sentiment and company earnings gradually improve.
