Buying cheap stocks today may not yield high returns for investors in the short run due to the risks faced by the stock market. Coronavirus lockdowns put in place across the world economy may lead to severe declines in global GDP that cause investor sentiment to be highly volatile over the coming months.

However, with economic growth likely to return in the long term, now could be the right time to buy a selection of high-quality businesses while they offer wide margins of safety. This strategy could produce high returns that boost your financial prospects over the next decade.

Long-term recovery

The world economy may experience severe disruption in the short run, but it is likely to return to growth in the coming years. Policymakers have enacted major stimulus programs that are likely to offer a significant amount of support to the global economy. For example, the US has reduced interest rates to zero and enacted an ‘unlimited’ quantitative easing program. These measures could make the process of returning to positive growth much quicker for the world economy.

Furthermore, the track record of global GDP growth suggests that a period of decline is unlikely to last over a sustained time period. Previous recessions have always given way to growth. Although the current economic crisis could be relatively severe, corporate profitability and cheap stocks are very likely to recover over the long run as GDP growth returns to a positive figure.

Holding period

Despite the prospect of an improving long-term economic outlook, investors should not expect to generate high returns on their holdings over the short run. Numerous short-term risks remain in place. They include a possible second wave of coronavirus, inflationary pressure and many other potential challenges that could lead to poor performance from the stock market.

Therefore, it is crucial to provide your portfolio with sufficient time to overcome short-term threats and deliver on its growth potential. Through buying and holding cheap stocks for a period of ten years, you could increase your chances of benefitting from a likely stock market recovery that produces high returns for your portfolio.

Buying cheap stocks

Of course, investors should not only focus on price when purchasing stocks. It is also crucial to consider other factors such as their financial strength, track record during difficult economic periods, and the presence of an economic moat. Assessing a company’s quality may require additional analysis and effort on the part of the investor, but it can help to identify which cheap stocks are the most attractive opportunities over the long run.

Buying a selection of cheap stocks and holding them for the long term has historically been a sound strategy to generate high returns. Although a recovery may not seem likely at the present time, the stock market has always returned to growth after its downturns. Investors who make purchases while valuations are low have often been among those who make the most attractive returns in the subsequent bull markets.

More reading

• Why we may be in danger of another coronavirus ASX market crash
• If I won the lottery I’d buy these 6 ASX shares
• Tax time is approaching – what you need to know
• You could beat the market in the 2020s with these ASX healthcare shares
• How to earn $50,000 in dividends each year with ASX shares

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Could a second ASX market crash be coming to the ASX?

The positive sentiment that has defined the S&P/ASX 200 Index (ASX: XJO) and the broader ASX markets since late March looks in danger. Friday saw a significant market sell-off that took the ASX 200 below 6,000 points and erased a substantial amount of gains made in June so far.

It followed the US markets shedding more than 6% in trading on Thursday night (our time).

So is this it for ASX shares? Can we expect another coronavirus crash to hit our portfolios over the next few weeks?

Why the ASX 200 has been hitting the roof  

Over the past 2 months, the positive sentiment that the ASX has been enjoying has come from 2 sources in my view. The first is the success Australia (and New Zealand to its credit) has had in dealing with the coronavirus. Compared with the United States and the United Kingdom, Australia has managed to keep the coronavirus infection rate extremely low. In turn, this has allowed the easing of economic restrictions and social movement.

This is obviously great news for the economy.

The second has been a spillover of goodwill from the US markets. Despite the country’s more muted success in containing the virus, US markets have been on a tear over the past 2 months, rising by more than the ASX 200. It’s rather unclear exactly why the Dow Jones, Nasdaq and S&P 500 have been on such an enthusiastic run. I suspect it has a lot to do with the US Federal Reserve and its unprecedented injection of cash into US financial markets.

Like it or not, the ASX’s fate is bound to that of the US markets – we ride or die together at the end of the day.

Is another ASX market crash coming?

I think the moves we saw on Friday were induced by the US. The Dow Jones saw a massive ~6% slump on Thursday night after the Federal Reserve chair Jay Powell issued a rather bearish outlook for the US economy for the rest of the year. According to reporting in the Australian Financial Review, this included a prediction from Powell that the US unemployment rate will still be above 10% by the time the US elections come around in early November.

If this turns out to be the case, I think it’s almost certain that the US markets won’t continue their recent run. Markets have (in my opinion) been assuming that the recovery from the coronavirus slump will be swift and painless – a sharp ‘V’ if you will. If anything else eventuates, markets will have to adjust accordingly (which may involve a crash).

I would be a fool (and not the good kind) to say that we are heading for another ASX market crash. But I’m certainly not ruling it out. I think investors should be very cautious and prepared going forward. We might see further highs from here, to be sure. But I think there’s more than an equal chance we might not.

More reading

• These were the best performing shares on the ASX 200 last week
• Why the Nearmap share price and one other are on my buy list
• Got $20,000? These are the ASX shares I’d buy during COVID-19
• 3 ASX shares I’d buy if the market hits 23 March levels again
• Leading fund manager names 4 ASX stocks set to benefit from a faster re-opening of the Australian economy

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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