A stock market rebound may occur in the short run after its recent crash. But the full impact of coronavirus on the world economy is a known unknown. The potential for a second wave of the virus later in the year may hold back investor sentiment to some extent.
However, over the long run, a return to growth seems highly likely. The stock market has always recovered after its past crises to post new record highs. As such, buying high-quality stocks today while many trade on low valuations could be a sound means of generating impressive returns over the long run.
An uncertain future
Due to the unprecedented nature of the coronavirus pandemic, it’s impossible to quantify its impact on the world economy. It may, for example, have already peaked and will fail to return. In this scenario, a relatively rapid stock market rebound could take place as investor confidence improves.
However, should there be a second wave, or a spread of the virus across many countries that have so far largely avoided its effects, the stock market could experience another highly challenging period.
As a result, predicting the short-term prospects for the stock market is tough call at present. Investors should, therefore, adopt a long-term approach to their holdings. Second-guessing the stock market’s movements in the coming months may not prove to be a worthwhile exercise.
Potential for a stock market rebound
While the near-term prospects for the stock market are highly uncertain, over the long run its outlook appears to be far more positive. The global economy has experienced numerous recessions in its past, and has always returned to strong GDP growth. Likewise, the stock market has always recovered from its bear markets and downturns to post fresh record highs.
Therefore, investors may wish to use the recent market crash to position their portfolios for a likely stock market rebound over the coming years. It may take some time for stock prices to recover to their pre-market crash highs. But history suggests they’re very likely to do so over the coming years. So the purchase of stocks while they offer wide margins of safety have been a successful strategy in previous market downturns.
Focusing on quality
Of course, buying high-quality stocks is more important than ever in the current economic climate. For any company to benefit from a stock market rebound, it must first survive the likely global recession that’ll take place this year.
Through purchasing stocks with strong balance sheets, defensive characteristics and sound growth strategies, you can limit your risks and increase your return prospects. This strategy may boost your chances of capitalising on a stock market rebound over the long run following one of the most severe market crashes in history.
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Motley Fool UK 2020