A second stock market crash is highly likely. Although it looks like the March bloodbath for shares has been left behind, it wasn’t. But it doesn’t mean that investors should be afraid. In fact, there’ll be many opportunities for them to retire early.
Why a second stock market crash?
Well, there are plenty of factors that can lead to another stock market correction. Most importantly this is the risk of a second lockdown. The world is suffering from another wave of Covid-19 infections right now. It may soon lead to a second wave of lockdowns, which could have serious economic consequences. Other important factors are the US elections and social unrest in this country. US-China relations also pose some substantial risks.
Moreover, share prices, especially in the US, don’t reflect companies’ fundamentals and this is a big problem. Stock market quotes tend to recover ahead of corporate earnings but many analysts argue that shares are overbought. Poor economic conditions, in turn, suggest that many businesses cannot be profitable now by definition. That’s especially true of businesses like airlines and tourist companies. The prompt actions of the central banks, meanwhile, helped the stock indexes around the world recover. They did so by printing money and exchanging it for bonds. As a result, the financial markets got liquid again. But it seems to me that we are in the situation of a stock market bubble. Unfortunately, all bubbles burst. And a second stock market crash may follow this stock market rally.
If history is any guide…
An example that immediately springs to mind is that of the dot-com bubble in the US. The mass media kept overhyping Internet technologies and the Fed kept easing monetary policy. That encouraged many investors to buy loss-making high-tech companies at unreasonably high prices. The bubble burst as these loss-making companies filed for bankruptcy protection. So, many people lost their money. This led to the recession of 2000–01.
However, this crisis also led to the rise of multinational giants like Amazon, e-Bay, and Netflix. You see, when crises like that occur, larger companies with good balance sheets survive, whereas smaller competitors go out of business. So, these larger companies even flourish and grow in size in the long run. It might sound strange but a similar situation occurred during the Middle Ages as a result of the plague. The economic and social chaos accompanying it gave rise to large corporations.
So, how can I get rich?
I fully agree with my colleague Peter Stephens. It would be quite a shame to miss such a rare opportunity to retire early. But in order to take advantage of a second stock market crash, you have to have some spare cash. So, I wouldn’t recommend keeping all the money invested in the stock market now.
At the same time, before parking your cash, you have to understand your attitude towards risk. If you are risk-averse, it might be best for you to keep a significant part of your money in an index fund. FTSE 100 has a really good recovery record. So, investing into a fund matching the Footsie’s performance seems to be reasonable. But buying largest individual companies with high credit ratings might produce even better returns. There are plenty of these in the FTSE 100.
