Will the FTSE 100 recovery continue?

The FTSE 100 won’t recover just yet, writes Thomas Carr.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 has rebounded 17% from the lows reached less than three weeks ago. Last week, the index rose by 8%, registering three daily gains of over 2%. Alas, despite these gains the FTSE 100 is still well below where it was back in February.

It’s an unfortunate facet of mathematics that to recoup the 32% that the FTSE 100 lost from February to March, it must subsequently rise by a much larger 48%. And so the premier UK index is still 21% below its February level.

After having initially largely ignored Covid-19 fears, the market moved sharply downwards, before correcting itself and moving sharply upwards. This is a great example of how investors often either underreact or overreact to news.

Isaac Newton famously said that he could ‘’calculate the motion of heavenly bodies, but not the madness of people’’.

Were these moves justified?

Looking back, it’s hard to find anything that justified such sharp movements. Did the initial worries about Covid-19 really justify such sharp downward movements? Did we learn anything last week and the weeks before to justify such a recovery?

In my opinion, the answer to both these questions is no. Shares derive their value from their future earnings. In low interest rate environments, shares are valued on their ability to produce earnings over many years, not just one year. As such, it looks to me like the broad-based sell-off in the FTSE 100 was an overreaction, sparked by mass fear.

Likewise, the subsequent recovery also seems to me to be over-done. If anything, what we have learnt in the last couple of weeks is that dealing with Covid-19 is going to be very damaging to the economy. And this damage could last a while, too. The inevitable recession looks like it could be worse than anything seen since the Great Depression, some 90 years ago.

What will happen to the FTSE 100 next?

For share prices and the FTSE 100 to carry on rising, there needs to be more buyers than sellers. That has been the case over the last two weeks, with investors tempted back into the market by super low and attractive prices. But there comes a time when, after shares have risen, prices become less attractive, and new buyers dry up. Personally, I don’t think we are too far away from that time. Especially considering that we will soon begin to see what effect Covid-19 has had upon the economy.

In times of great uncertainty, investors react quickly to short-term news, moving share prices sharply in one direction. Investors tend to stick together, so if an investor sees the market moving abruptly downwards, they too will sell their stocks, and vice versa. These volatile movements in different directions are the market’s way of establishing an equilibrium. Over time, as the uncertainty reduces, stock prices will more closely reflect reality.

In the meantime, there are still some opportunities for investors to buy quality companies at undervalued prices. Albeit there are significantly fewer opportunities than there were just two weeks ago. But don’t worry about missing out, I have a feeling that there will be plenty more opportunities to buy into this crash. Just make sure to pay attention to value.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Down 27% in 3 days! Should I buy the dip in this FTSE 250 defence stock?

This FTSE stock has collapsed in recent days, leaving this Fool wondering if he's looking at a buying opportunity for…

Read more »

Investing Articles

Is ITV a screaming FTSE 250 bargain hiding in plain sight?

Down by over two-thirds in around a decade, this well-known FTSE 250 share now trades on what may look like…

Read more »

Investing Articles

Is this FTSE 100 AI growth stock beginning to run out of steam?

Despite it being a runaway success, Andrew Mackie is becoming increasingly concerned for the momentum of this AI growth stock.

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Up 12% today, here’s a great FTSE 250 growth share to consider!

Softcat's share price is soaring following a blockbuster first-half trading announcement. Here's why the FTSE 250 share is worth a…

Read more »

Growth Shares

Prediction: in 1 year, the easyJet share price could be as high as…

Jon Smith points out why the easyJet share price could head higher over the coming year based on the current…

Read more »

Investing Articles

Up 21% with dividends on top! See the stunning Shell share price forecast for 2025

Brokers are feeling optimistic about the outlook for the Shell share price, predicting solid growth this year. But Harvey Jones…

Read more »

Investing Articles

£10,000 invested in AstraZeneca shares 1 year ago is now worth…

AstraZeneca shares have recovered from their brief slump with investors broadly buoyed by the company’s long-term business prospects.

Read more »

Investing Articles

What’s going on with Nvidia stock?

Nvidia stock has slumped, and it seems that CEO Jensen Huang may have lost the Midas touch after his AI…

Read more »