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Stock Market Crash? No! But a Correction May Be Just Around the Corner

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While many economies contracted amid the pandemic, the global stock markets continued to soar higher in the last few months. Even the rising coronavirus cases did not deter the stock market momentum. So, will we see the crash anytime soon?

Is the stock market crash in the making?

No! The economic contraction driven by near-zero business activities during the outbreak’s peak led to a major market crash in March. However, we have seen a significant improvement since then. Rising consumer spending, lower unemployment, and better than expected second-quarter corporate earnings indicate that the worst is likely over.

Here in Canada, authorities have been successful in softening the second wave of the outbreak so far as compared to the south of the border. Additionally, a vaccine launch earlier than expected could notably alleviate fear among consumers, which will likely boost spending and corporate investments. Also, another tranche of government support might continue to underpin stocks.

Stocks are overbought and overvalued

But certainly, stock markets seem to have gone too far too fast. Many top Canadian stocks look overvalued and might lead to correction before they move higher further. Besides, the recent rally in the S&P 500 and the TSX Index was disproportionate and was principally driven by tech stocks. Energy and financial stocks notably underperformed the broad market indexes in the last few months.

While the economic recovery might remain shaky for the next few months, it might not fall to lows, as seen in the second quarter. This could lead to an interim stock market weakness but not a crash. Any disappointment on the vaccine front also seems unlikely as multiple players across the globe have given rational timelines for the launch.

Lockdowns halted many business activities during the second quarter, and now we know that it was not a foolproof solution. Thus, full-fledged lockdowns as earlier might not return. This suggests that it is unlikely that businesses will hit lows as they did in the April-June quarter.

What should investors do?

Notably, while mainstream financial media is busy with its market crash rhetoric, there is absolutely nothing to worry about for long-term investors. Market crashes come and go. Why should you be concerned when you have a five- or 10-year time horizon?

If you don’t have a leverage-based position and have sufficient cash to take care of your emergency needs, stock market volatility will not affect you. Even if your portfolio value tumbles by say 20%, it should be an attractive opportunity for dollar-cost averaging.

Investors can rebalance their portfolios with relatively higher exposure to dividend-paying stocks like utilities. Although they are boring businesses and have slow-moving stocks, the stability they provide is unmatchable. Investors can consider top utility stock Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN). It pays secured dividends and yields 4.5% at the moment, higher than peer top utility stock Fortis.

Even if markets crash, utilities like Algonquin keep on paying dividends because of their stable and visible earnings. With its increasing dividends and steady capital appreciation, Algonquin stock has returned more than 620% in the last 10 years. That’s more than double the S&P 500.

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Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned. The Motley Fool recommends FORTIS INC.

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