While many investors fret about a second stock market crash, I reckon there’s a good reason to expect a stock market surge upwards.
Unlike many downturns, the difficulties we’re seeing today didn’t occur because there’s something broken in the economy itself. The main reason for the fall in GDP is the Covid-19 pandemic – an event unrelated to the direct workings of the economy.
This is different from the problems in the banking and finance sector that gnarled up the economy in 2007-08 with the credit crunch. Something was wrong with the way the economy was working back then. And that’s why the Great Recession set in, which was a period of decline in national economies everywhere between 2007–2009.
Government policy may drive a stock market surge
As many remember, the UK government aimed to restore the UK’s finances with a policy of austerity. But this time, following the coronavirus crisis, the government looks like it’s taking a different approach. And I think we may see the stock market go on to thrive because of it.
This time the government appears to be aiming to spend the UK back to economic health along the lines of the fiscal policy ideas of one-time British economist John Maynard Keynes.
Keynes came up with his influential ideas in response to the Great Depression, which hit the world between 1929 and 1933. You might have heard about that one. Many investors lost their shirts when the stock markets of the day crashed during 1929.
It was a big event, and more than just the usual economic swing. Keynes saw that the disruption in economies would probably not self-correct. So he suggested massive intervention from governments. Indeed, by adjusting spending and tax policies, he argued governments could stabilise the business cycle. It would make up for the shortfalls in consumer consumption and business investment in the private sector.
A supportive environment for shares
Keynes’ ideas led to the New Deal in the US – a programme of massive spending on public works projects and social welfare programmes. And today’s UK government appears to be taking a similar spending approach to tackling the coronavirus-induced recession.
My guess is the policy will work well and act as a safety net to stop the UK economy sinking too far down. And I think it may prove to be supportive of shares on the stock market too. I reckon there’s a good chance it will help businesses to thrive. We may even see the economy returning to growth rather than mere recovery.
So, with a long-term investment horizon in mind, I’m an enthusiastic buyer of good-quality shares right now. The government’s approach to the economic crisis may act as a safety brake to mitigate downside risks in the stock market. And I believe there’s a good chance general economic progress will help businesses prosper and grow. And that will potentially drive a stock market surge in the years ahead.
