The stock market crash is showing little sign of abating. Indeed, the FTSE 100 has experienced a high degree of volatility in recent trading sessions. This trend may continue over the coming weeks, as a variety of forecasts suggest the number of coronavirus cases could increase rapidly.
For long-term investors, a market crash can present buying opportunities. Low valuations, recovery potential, and the stock market’s track record suggest now could be the right time to buy solid businesses. Then you should hold onto them over the coming years to improve your chances of retiring early.
Low valuations
It’s difficult to ascertain whether some stocks in the FTSE 100 currently offer good value for money. After all, measures such as the price-to-earnings (P/E) ratio could paint an inaccurate picture. Many businesses will experience severe falls in their bottom lines and their eventual recoveries are not guaranteed.
However, in many cases, FTSE 100 shares now offer wide margins of safety. The index is trading at a similar level to where it was in the late 1990s. Meanwhile, its dividend yield is the highest it’s ever been. Moreover, the price-to-book (P/B) ratios of many of its members are relatively low. Overall, this suggests investors are pricing in a very challenging period for the index.
Recovery potential
Given the negative news flow that’s likely over the coming weeks regarding coronavirus, a stock market recovery may seem unlikely. However, the FTSE 100 has a strong track record of delivering improving returns following its various crises.
At times during the 1987 crash, it felt as though the economic outlook would never improve. Likewise, it was difficult to see how the FTSE 100 could return to its record highs following the dot com crash and the global financial crisis.
However, over time, investor sentiment has always improved. FTSE 100 companies have gradually reported growing levels of profitability following a range of bear markets. Investors who’ve been able to buy stocks during the periods where a recovery seems most unlikely have historically been among the most successful. As such, following a similar strategy in the current market crash could be a shrewd long-term move.
Financial strength
Of course, before any stock can recover, it must first survive the coming economic challenges. Sectors such as housebuilding, retail and many others are essentially shutdown until further notice.
Although government support may help them to pull through in the coming weeks, the operating conditions faced by many FTSE 100 sectors may be highly challenging for a sustained period.
Therefore, buying companies with strong balance sheets is essential at present. They may be in the best position to overcome the threats posed by coronavirus, and to emerge in a stronger position relative to their peers.
Through buying such businesses while they offer wide margins of safety, you can improve your chances of generating high returns and of retiring early.
