Is there going to be a second stock market crash? By that, I mean will the FTSE 100 plunge below the 5,000 level again, like it did in March? Here are three reasons why there really could be another crash.
Call it a second wave, call it a continuation of the first wave, call it what you like. Covid-19 cases are on the rise again around the world. Germany has a new lockdown, but the USA is where the biggest threat seems to be now. In the latest news, New York has imposed quarantine rules on people entering from eight states were cases are climbing again. Texas and Florida look like they’re heading for record daily cases again.
While the pandemic looked like slowing and lockdowns were being opened up, I think investors have been becoming complacent. Well, almost everyone has. In the light of these, and other, developments, we’ve already seen the FTSE 100 falling again. But the coronavirus alone might not be enough to precipitate a renewed stock market crash.
We knew the pandemic crisis was going to hit the UK economy in 2020. But did any of us expect things to be as bad as the latest forecasts suggest?
The International Monetary Fund (IMF) is now predicting a 10.2% shrinkage this year, one of the worst in the world. With around a third of UK workers furloughed, we’re set to underperform the predicted world average fall of 8%. France, Italy and Spain are tipped to do even worse than us, but most of the rest of the world could be heading for less pain.
An economic collapse is certainly one way to trigger a stock market crash, and if things are as bad as the IMF suggests, a second one might be just around the corner.
Double dips happen
Don’t things often seem bad, appear to brighten up, and then look sour again? I think it’s part of human nature. We do, so often, tend to overreact to bad news. Then we cheer up a bit when we’ve taken stock, but that is so often premature and the early optimism can turn out to be misplaced.
Only when we’ve been through these initial ups and downs do we take a longer and more rational look at things. If enough investors decide the next year is going to be worse for stocks than they’d originally suspected, the stock market crash really could resume.
Stock market crash response
Selling out when shares are in a slump seems to me to be the obviously wrong approach. I think it’s the exact opposite of what we should be doing. Look back at each previous stock market crash throughout history, and after every single one of them we had a strong recovery. And shares went on to resume their long-term upward march.
But when will the true recovery really start? Well, we can’t know that until some time after it’s happened and we’ve missed out on some very cheap shares. So I say lose any thoughts of trying to time things. If you see shares you like that you think are cheap, just buy them.
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Views expressed 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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