The FTSE 100 has steadied again but investors remain extremely jumpy. Dip-buying activity remains thin on the ground as market makers consider the possibility of a second stock market crash.
It’s impossible to say with any degree of certainty whether another crash is around the corner. But there’s certainly plenty of potential problems that could cause a fresh financial market meltdown. Here are three reasons why a second share market collapse could happen sooner rather than later.
Second wave = second stock market crash?
The easing of lockdown restrictions across the globe have allowed stock indexes to creep steadily higher from their March troughs, leading to hopes of swift economic improvement.
Have politicians been too quick in lifting restrictions, though? A subsequent secondary spike in coronavirus cases has led many to believe that the answer is ‘yes.’ Parts of China have had to be locked down again in recent days. Infections in some parts of the US continue to balloon. And today the World Health Organisation said that it has seen a resurgence of cases in more than 20 European countries.
News flow has led to speculation that efforts to steadily ease lockdown restrictions could be slowed. Some are suggesting that strict quarantine measures could be re-introduced in a move that would deal a bodyblow to the economic recovery and likely cause another market crash.
Fear the first wave
Growing infection rates are especially worrying to owners of emerging markets shares right now. Forget a so-called second wave; many countries in the developing world are still reeling from the first.
The daily infection rate in India has just hit a new record high. The death toll in Brazil has just passed 50,000 and continues to climb, putting it second behind the US. The number of new daily cases in South Africa has also hit new peaks. Many emerging nations still have much to do to fight this first wave.
It might not be splashed on the front pages right now but trade tensions between the US and its major trading partners could also spark a fresh stock market crash.
Icy relations between Presidents Trump and Xi have been a significant source of market tension for the past couple of years. But forget the US and China for a second. A new front on the battle reopened this week as Trump ponders slapping $3.1bn worth of tariffs on German, British, French, and Spanish goods. It’s the last thing that a global economy already hammered by the coronavirus crisis needs.
What should you do?
A second stock market crash could well be approaching, then. But it doesn’t mean that investors need to pull up the drawbridge. I’d argue that another collapse in share prices would provide another great buying opportunity for those who buy stocks and hold them over a long time horizon.
As Warren Buffett says, those hoping to make the biggest profits need to “be fearful when others are greedy, and greedy when others are fearful”. Another stock market drop could give savvy stock pickers a fresh chance to maximise their investment returns.
The post Second stock market crash – 3 reasons why it could be coming, and what I’d do right now appeared first on The Motley Fool UK.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned 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.
Motley Fool UK 2020