What will happen next to the ASX 200?

What will happen next to the S&P/ASX 200 Index (ASX: XJO)? Is it going to keep recovering? Or is there another crash coming?

The coronavirus has caused a lot of damage to the share market and economy, the global human death toll has been even worse.

The initial 36.3% fall to 23 March 2020 was a large, quick drop. But the 20.7% recovery has also been surprising in how fast it has come.

What's going to happen next? There are arguments for both a continuing recovery and for another crash.

The ASX 200 is going to keep recovering

The share market is always forward looking. Many fund managers, analysts and commentators said that they were closely monitoring the rate of the spread of the infection. Once that slowed down, some people may see that as the signal to buy in for the start of a recovery.

The only western country the coronavirus seems to be spreading in rapidly in the US, and even there it seems to be getting better in the coastal states where it hit first. And for the ASX 200 in-particular, Australia hasn't been hit hard like the US, UK or Europe has been.

There has been enormous support put into the global economy. Almost every major country has announced large government support for individuals and businesses. Central banks are also playing their part by providing liquidity.

Plus, interest rates are now at ultra-lows in Australia, Europe and the US. Share valuations should always take the current interest rate into account. And the value of a share is more than just its 6-month or 12-month earnings, even if those shorter-term periods are going to show earnings have been smashed. FY22, FY23 and so on should be considered for the valuation.

Finally, investors may keep looking at the GFC experience and see that even if things got bad, shares did recover.

If there continues to be buying support then the falls are unlikely to be that bad.

The ASX 200 is going to drop again

Share markets are often too optimistic or pessimistic. I think there is a good chance that investors are not fully taking into account the potential negative scenarios from the impacts of coronavirus.

What happens if there's a second wave of infections in Europe or the US, particularly if lockdowns are lifted too early? What if the tight restrictions have to last longer than six months? That could be bad news for shares like Sydney Airport Holdings Pty Ltd (ASX: SYD) where revenue is almost gone.

A vaccine could take longer than expected – or one may never be able to be created.

A lot of people may not just go back to their old habits and have the same money to spend as before.

There could be a complete shift to working at home which may be troublesome for several industries.

For me, the most likely thing to cause another share market decline is when investors get a look at how hard business earnings have been hit. The next few months will be very interesting as companies give scheduled (and unscheduled) business updates.

Foolish takeaway

My guess is that there may well be another period of declines when the economic realities settles in. But that could be any time this year. I'm not going to wait to invest. I've been investing throughout this period on the way down and with the recovery where I saw value. I'm going to keep investing. 

Returns as of 7/4/2020

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Sydney Airport Holdings Limited. 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.