Last week was another good one in the markets. And on the surface, the prospect of a second stock market crash seems remote. Many shares went up, buoyed by the news that lockdowns are gradually lifting around the world.
On top of that, companies have been updating investors about their trading and financial performances. In many cases, underlying businesses have been coping through the crisis better than investors feared.
Will there be a second stock market crash?
However, it’s natural to feel nervous about the stock market when it’s going up. Often, shares seem at odds with what’s happening on the ground. Indeed, many businesses have been crushed by the crisis and haven’t seen revenues for weeks.
As human beings, we are all still suffering. We haven’t been able to visit our loved-ones for what seems like an eternity. The ongoing threat of the virus remains very real. So why are stocks behaving with such exuberance?
There isn’t a cast-iron explanation for the rises in the stock market. It’s true that the stock market tends to look forward. What we see now is perhaps the market trying to predict where we’ll be in the real world three, six or even nine months ahead.
But we all know it isn’t going to be an easy journey. Lockdowns are lifting, but only for companies in England, for example, that make sure their operations follow government guidelines for working safely in a world with coronavirus.
Costs set to rise
And following the guidelines aimed at reducing the transmission of the virus will add to costs for many firms. On top of that, measures such as enforcing social-distancing will reduce the throughput of customers in many businesses such as shops and others.
It seems clear that lower footfall will lead to reduced revenues in many cases. Indeed, a squeeze on revenues married to a boost to costs can only put profit margins under pressure. And it makes sense that share prices are lower if profits will be smaller.
But the forward-looking visibility is so bad that many companies have withdrawn guidance on earnings and trading. On top of that, many have cancelled or postponed shareholder dividend payments.
With so many uncertainties still in the air, we might think that shares should stay down where they’ve been until the coronavirus passes. Indeed, even Warren Buffett has been uncharacteristically reticent about buying ‘cheap’ shares. And he’s on record as admitting he has no idea what will happen next. In fairness though, Buffett has made few macro calls. And his decision to sell out of the airline stocks he held is understandable given that the entire industry may never again be what it once was.
Is the second stock market crash of 2020 about to hit? Maybe. But stock markets have always climbed a wall of worry. And I’m handling the situation by buying selective stocks and holding them with a long investment horizon in mind. Ten years from now, even if there’s another crash, I may be glad I bought shares now.