With the stock market crash of the spring still in investors’ minds, many have wondered if we are about to see a second big plunge. And shares slipped back a fair bit last week. Yet so far, we haven’t seen a retreat on the scale of the spring reversal.
But there’s been a lot to worry about, such as the resurgence of Covid-19 infections, further lockdowns, the US presidential election and the ongoing Brexit free trade agreement negotiations with the EU. However, there are some powerful reasons to believe we could already have seen the worst of any second stock market crash in 2020.
Why a second big stock market crash may not happen
Indeed, from where we are now, the flow of news could start to improve. For example, the removal of the uncertainty of the US election is imminent with the voting happening today. And the Brexit free trade agreement outcome will likely be known soon. Meanwhile, the recent measures taken by governments to curb the spread of Covid-19 will probably work quite well. And the graphs showing rates of infection growth could begin to curl over – perhaps that process has already started.
I think there are some clues in the markets suggesting a positive move ahead. For example, the CBOE Volatility Index (VIX) is a measure of price fluctuations expected in the S&P 500 index in America. Investors often jokingly refer to the VIX as the fear index. And the predictive nature of the VIX makes it a measure of implied volatility looking about 30 days ahead.
So, it works as a rough measure of investor sentiment, and some people use it as a leading indicator. And right now, the interesting thing is the VIX seems to be declining from a peak, suggesting we could see less volatility ahead. Indeed, when the VIX hits its peaks, the general stock market has usually hit its troughs. So, we could see rising share prices ahead.
I’d buy cheap shares right now
And I think the recent movements in bank shares support that probability. Indeed, banks can work as leading indicators too. I read the investing books published by Peter Lynch and David Dreman and learned that bank shares can be among the first cyclical shares into and out of recessions and downturns. So, I’m encouraged by the strength we’re seeing in stocks such as Lloyds, NatWest, Barclays and HSBC. Indeed, they’ve been surprising the market recently with higher-than-expected earnings.
I reckon it’s possible we could be nearer to the beginning of a bull market than we are to a stock market crash. So, I’d use the current window of opportunity — while many shares are depressed — to pick quality stocks for my long-term portfolio.
And one approach could be to research cyclical shares that could resurge in a new bull market, such as Aviva, Bellway and Norcros. I’d also consider defensive stocks that can suffer from valuation cycles, such as GlaxoSmithKline, Smith & Nephew and British American Tobacco. Indeed, many shares look like they are out of favour with investors right now and could be selling cheap.