The stock market’s recent crash may lead some investors to consider purchasing other assets such as gold and Bitcoin. After all, the outlook for the world economy is highly uncertain. This may lead to lower earnings for many companies that could produce disappointing stock price returns in the near term.
However, the recovery potential of the stock market means that now could be the right time to buy a diverse range of businesses while they offer wide margins of safety. They could outperform gold and Bitcoin, both of which may face uncertain long-term outlooks.
Prospects for Bitcoin and gold
The price of gold may have risen to a seven-year high in 2020, but its scope to deliver further gains may be limited by an improving economic outlook over the long run. Investor sentiment towards the precious metal has improved due in part to its defensive appeal at a time when the economic outlook is uncertain.
However, the prospect of improving GDP growth may cause investors to gradually switch their attention to riskier assets over the coming years. This may reduce demand for defensive assets such as gold.
Likewise, the future for Bitcoin could be less positive than many investors are currently anticipating. The virtual currency faces regulatory uncertainty that could limit its capacity to replace traditional currencies.
Furthermore, its limited size and the threat posed by other virtual currencies may mean that investor sentiment towards Bitcoin fails to strengthen. Due to its price being dependent on sentiment rather than fundamentals, this could lead to a disappointing performance from the cryptocurrency.
Stock market potential
In the near term, the prospects for the stock market could prove to be highly challenging. News regarding coronavirus may mean that other assets, such as gold, continue to outperform global equities in the coming months.
However, over the long run, the stock market appears to have strong recovery potential. It has a solid track record of recovering from even its very worst downturns. For example, indexes such as the FTSE 100 and S&P 500 halved during the global financial crisis. They went on to not only recover from their downturns, but to also post new record highs in the bull market in the years following the global recession.
Although a similar outcome may seem unlikely at the present time, now could be an opportunity to buy high-quality stocks while they offer wide margins of safety. This may enable investors to obtain favourable risk/reward ratios that ultimately lead to higher returns in the long run as the world economy gradually recovers.
This process may take time, which is why a long-term view is likely to be crucial for any investor purchasing stocks at the present time. But by building a diverse portfolio of stocks, you could generate higher returns than investing in other assets such as gold and Bitcoin over the coming years.
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