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Warren Buffett: Q1 2021 Market Crash Could Be More Devastating Than Q1 2020

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Canadian stocks failed to stage any noticeable Santa Claus Rally this year. The S&P/TSX Composite Index rose by a minor 0.4% last week, while the key U.S. indexes, such as the S&P500 and the Dow Jones, also remained nearly silent. It could be an early indication of an upcoming market crash that would make Q1 2021 even worse than Q1 2020. Let’s learn why.

Warren Buffett’s wise decisions in 2020

The world regards Berkshire Hathaway CEO Warren Buffett as one of the best investors alive today, and he keeps on proving it true over and over. On the onset of the COVID-19 pandemic, he acted swiftly to exit his airline industry positions. While many experts called Buffett’s airline stock offloading decision a panic move, he was proved right again as the year 2020 is about to end.

Most airlines are struggling with a massive decline in air travel demand due to the ongoing pandemic. Positive news related to coronavirus vaccines fueled a rally in airline stocks in November. Nonetheless, their future remains in the dark due to a recent rise in more shutdown uncertainties due to a new coronavirus strain — first found in the United Kingdom. As a result, airline stocks fell sharply again in December.

His warnings

In a recent CNBC interview, Buffett shed some light on small businesses’ deteriorating condition after the pandemic. He called the COVID-19 related lockdowns a “self-inflicted recession” that hit “many types of small businesses very, very hard.”

Some may argue that small businesses’ poor condition might not be enough to trigger a recession and a devastating market crash in the first quarter of 2021. However, we must not forget that most big businesses — especially except a handful of tech and e-commerce companies — are also facing COVID-19 headwinds, even today.

These big companies might not be prepared for another round of shutdowns, as feared by investors due to the new coronavirus variant. More restrictions and lockdowns could lead to a series of bankruptcies that could very well trigger a massive sell-off and a bigger market crash in Q1 2021 than what we saw in Q1 2020.

How to deal with a market crash in Q1 2020

While the fears of a short-term market crash and an upcoming recession — due to the factors mentioned above — might have changed the near-term market view, they don’t affect the long-term investment scenario. You could still continue to invest in great income-yielding stocks such as Allied Properties Real Estate Investment (TSX:AP.UN) for the long term.

It’s a closed-end real estate investment trust (REIT) focusing on income-producing office, retail, and residential properties. The COVID-19 headwinds affected its overall business operations in 2020 — leading to a 27.5% year-to-date drop in its stock. But Allied Properties’s long-term business goals and profitability remain nearly unaffected. The REIT’s total revenue continued to improve in the last couple of quarters, despite these temporary headwinds.

Allied Properties Real Estate Investment stock currently offers an impressive 4.4% dividend yield. It translates into $1.64 per share in 2020. Its dividends are likely to rise in 2021 further. So, the recent drop in Allied Properties Real Estate Investment stock could be an opportunity to invest in a good safe business. It could be a good passive-income option for long-term investors.

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The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short January 2021 $200 puts on Berkshire Hathaway (B shares) and long January 2021 $200 calls on Berkshire Hathaway (B shares). Fool contributor Jitendra Parashar has no position in any of the stocks mentioned.

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