There is a very real threat that a second stock market crash will occur in the coming months. Risks such as heightened political uncertainty in Europe and North America, the ongoing coronavirus pandemic and a difficult economic outlook could weigh on the prospects of a wide range of businesses in 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 present. This may mean that they offer the potential for recovery as the economic outlook gradually improves.
A second stock market crash
There is always a risk of a stock market crash. Indeed, they have already occurred without prior warning on numerous occasions.
However, at this time, it could be argued that a market downturn is more likely than it usually is. Risks such as heightened political uncertainty in Europe and North America could dampen investor sentiment. Likewise, the coronavirus pandemic remains a known unknown in terms of its impact on the economy at large. This could cause investor sentiment to weaken in the coming months.
Therefore, the occurrence of a second stock market crash would probably not be taken as a surprise by many investors. This does not mean that it is guaranteed. However, the threat of a market downturn may mean that the idea of buying stocks is becoming less popular with some investors.
Buy opportunities in an uncertain market
The potential for another stock market meltdown means that many high quality companies are currently trading at low prices. To be sure, some stock prices have recovered from lows reached earlier this year. However, many other companies continue to post valuations well below their long-term averages. This suggests that investors are very cautious about their outlook, which could create buying opportunities for their peers in the long run.
In some cases, investor caution is warranted. Some companies have weak balance sheets and may not benefit from a long-term economic recovery. However, other companies are in a healthy financial position and are expected to return to positive long-term earnings growth. These companies trade at prices below their intrinsic values in some cases. This could indicate that they are among the most exciting buying opportunities available today.
Of course, some investors may think that there is no guarantee of recovery from a stock market crash. Although it may be the case, the past performance of indices such as S&P 500 Index (SP: .INX) and FTSE 100 Index (FTSE: UKX) suggests that a return to previous records is very likely.
Therefore, investors who build a diverse portfolio of high-quality companies when trading low could generate impressive returns as the economy recovers and investor sentiment improves.
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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia does not have a position in any of the titles mentioned. We fools may not all have the same opinions, but we all think that diverse range of information makes us better investors. The Motley Fool has a disclosure policy. This article only contains general investment advice (under AFSL 400691). Authorized by Scott Phillips.