How a Stock Market Recovery Could Boost My Chances of Making a Million

A stock market recovery could mean improving investor sentiment and stronger economic conditions, in my view. This may make it easier to make a million.

A stock market recovery has always taken place following previous bear markets. As such, the long-term prospects for indexes such as the FTSE 100 are relatively attractive.

Certainly, some stocks may experience further challenges due to risks such as the ongoing coronavirus pandemic. However, buying them at a discount to their intrinsic values could mean capital appreciation potential that makes it easier to generate a portfolio valued in excess of a million.

Improving investor sentiment in a stock market recovery

A stock market recovery can encourage investors to become more optimistic about the future. They may see the value of their own holdings increase, and determine that further gains are possible. A rise in share prices may also remind them that the stock market operates in cycles. No downturn or upturn has ever lasted in perpetuity. However, it is easy to forget this during periods of extreme market performance. As share prices rise, investors may become less risk averse. This can help to sustain a bull market over the long term.

As such, holders of today’s cheap stocks could benefit the most from improving sentiment. Such companies may currently be relatively unpopular due to their weak near-term outlooks. However, as investors become less risk averse, they may begin to focus on undervalued companies to a greater extent. This may mean that investors who have purchased cheap stocks during the 2020 stock market crash see the value of their portfolios increase in a stock market recovery.

Stronger economic conditions after the stock market crash

A stock market recovery is often linked to the world’s economic outlook. If investors believe that economic conditions are improving, they generally become more bullish about equities.

Improving economic conditions suggest that the operating environment for businesses is likely to strengthen. This may mean that those companies which have struggled to post rising sales and profit this year are able to deliver stronger financial performances. This may help to justify even higher share prices, since a higher earnings per share figure equates to a higher share price when its multiple of earnings remains constant.

Clearly, company operating conditions can change quickly in a stock market recovery. However, the economy’s past performance suggests that they are likely to rebound after the challenges experienced in 2020. Therefore, investors who have purchased struggling companies this year may benefit from an upturn in their operating outlook in 2021 and beyond.

Making a million in a stock market rally

Even if a stock market recovery only allows an investor to generate the market rate of return, they can still build a large portfolio over the long run. For example, the stock market has produced an annual total return of around 8% over the long run. Such a rate of return would turn $100,000 into $1m within 30 years. Similarly, a $750 monthly investment would be worth a seven-figure sum over the same time period at the same return.

However, through buying today’s cheap stocks and holding them ahead of a long-term stock market recovery, it may be possible to earn a higher return. Investors who have purchased undervalued stocks this year could stand to benefit the most from a likely improvement in investor sentiment and company operating conditions in the coming years.

More on Investing

Retirees sip their morning coffee outside.
Tech Stocks

2 Technology Stocks With the Kind of Potential That Could Make Millionaires

Two tech stocks with impressive growth trajectories amid elevated volatility are potential millionaire-makers.

Read more »

a man celebrates his good fortune with a disco ball and confetti
Dividend Stocks

Where Will Enbridge Stock Be in 3 Years?

Enbridge stock has raised its dividend for 31 straight years. With a $39B project backlog and 5% growth ahead, here's…

Read more »

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Why the Market May Be too Quick to Write Off These Railway and Telecom Stocks

Discover why the railway and telecom markets are experiencing significant declines and what it means for investors and value growth.

Read more »

Lights glow in a cityscape at night.
Dividend Stocks

2 Dividend Stocks I’d Buy Today and Feel Good Holding for at Least 5 Years

Want dividend income that will last for the five years to come? These two dividend stocks are leaders in Canada.

Read more »

A plant grows from coins.
Dividend Stocks

2 Canadian Dividend Stocks Yielding 4% That Appear to Have the Goods to Back It Up

These Canadian dividend stocks are dependable investments, offer attractive yield of over 4%, and are backed by solid businesses.

Read more »

Investor reading the newspaper
Dividend Stocks

A 3.9% Dividend Stock That Looks Safer Than It Seems

Transcontinental just reshaped its business with a $2.1 billion sale, and that cash could make its dividend look safer than…

Read more »

Young adult concentrates on laptop screen
Retirement

What the Typical 25-Year-Old Canadian Has Saved in a TFSA and RRSP

If you are around 25-years of age, here are some ideas on how to use both your RRSP and TFSA…

Read more »

infrastructure like highways enables economic growth
Energy Stocks

This Canadian Stock Could Rule Them All in 2026

Canadian Natural Resources just posted record production and 26 straight years of dividend hikes. Here's why CNQ stock could dominate…

Read more »