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.

falling red arrow and lifting

Image source: Getty Images

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Growing plant shoots on coins
Dividend Stocks

3 Magnificent Ultra-High-Yield Dividend Stocks That Are Screaming Buys in April

High yield stocks like BCE (TSX:BCE) can add a lot of income to your portfolio.

Read more »

grow money, wealth build
Dividend Stocks

1 Growth Stock Down 24% to Buy Right Now

With this impressive growth stock trading more than 20% off its high, it's the perfect stock to buy right now…

Read more »

Dividend Stocks

What Should Investors Watch in Aecon Stock’s Earnings Report?

Aecon (TSX:ARE) stock has earnings coming out this week, and after disappointing fourth-quarter results, this is what investors should watch.

Read more »

Freight Train
Dividend Stocks

CNR Stock: Can the Top Stock Keep it Up?

CNR (TSX:CNR) stock has had a pretty crazy last few years, but after a strong fourth quarter, can the top…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

3 Stocks Ready for Dividend Hikes in 2024

These top TSX dividend stocks should boost their distributions this year.

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Stocks for Beginners

What Investors Should Take Away From WinPak Stock’s Earnings

WinPak (TSX:WPK) stock has stagnated in share price over the last few years, but has there been enough momentum to…

Read more »

pipe metal texture inside
Dividend Stocks

TC Energy Stock: An Undervalued 7.8% Dividend Stock

TC Energy stock appears to be trading at a discount of about 20%.

Read more »

Man data analyze
Dividend Stocks

1 Dividend Stock Down 13% to Buy Right Now

Parkland (TSX:PKI) stock may be down by 13%, but shares are still way up in the last year. So, this…

Read more »