An uncertain economic future may lead some investors to doubt whether a stock market recovery can take place after the recent crash. Certainly, there has been a rebound in the share prices of many companies after their March lows. However, risks such as an ongoing threat from coronavirus could mean that some investors doubt the long-term growth prospects for the stock market.
Despite an uncertain economic future, low valuations on offer across many industries mean that shares could deliver higher returns than other mainstream assets. As such, a portfolio of stocks could boost your financial prospects and increase your chances of retiring early.
The prospects for a stock market recovery
The chances of a stock market recovery often appear to be remote during periods of economic difficulty. It was the same in previous declines, such as the tech boom and the global financial crisis. Even as stock prices rebounded and gradually increased following those declines, risks were still present that could curtail their progress. This led many investors to wait for more subdued economic conditions before buying shares, thereby missing out on the most attractive buying opportunities.
It's a similar story right now. Risks such as further incidences of coronavirus and political uncertainty in Europe and the US towards the end of 2020 may cause volatility to rise. However, over the long run, investing in shares has proved to be a sound means of generating relatively high returns. The capacity of indexes such as the FTSE 100 and S&P 500 to recover from their difficulties is high, and means that a stock market recovery from the 2020 crash is a likely outcome.
The threat of a second market crash
The threat of a second market crash, and investor uncertainty regarding a market recovery, means that many stocks continue to trade on low valuations. When coupled with the ongoing risks facing the world economy, this could make today an opportune moment to build a portfolio of shares due to the existence of wide margins of safety.
Undervalued shares appear to offer greater return potential than other assets such as cash and bonds over the long run. Similarly, high valuations in the property market mean that the scope for impressive total returns compared to equities may be relatively low.
Therefore, investors who have a long time horizon may wish to commit a large proportion of their capital to stocks at the present time. Even if share prices come under pressure in the short run from the aforementioned risks, over the long term major indexes have generally posted total returns that are in the high-single digits. Through buying undervalued shares today, you may even be able to generate market-beating returns that make a positive impact on your retirement date.
