There is no doubt that the coronavirus pandemic started the FTSE 100 bear market in late February 2020. The FTSE 100 fell by almost 50% over about a month, making it one of the fastest bear market declines on record.
But the bear market started well before the UK began its lockdown. FTSE 100 companies get just about 30% of their revenues in the UK. What is happening in the rest of the world, particularly the US and China, has a significant bearing on the fortunes of FTSE 100 stocks.
Since the UK went into lockdown on March 23, the FTSE 100 has recovered about 16% of its value. The US S&P 500 has risen by about 27%. China’s main index crashed in January, recovered, then fell again, and has again started to creep higher.
Recovering from the market crash
If the coronavirus pandemic started the bear market, then ending the outbreak should bring about its end. Some countries are beginning to lift restrictions tentatively, while others are eyeing dates to do so. China’s economy is slowly grinding back into life.
According to early trial data, Gilead Sciences‘ antiviral drug remdesivir appears to be effective in reducing fever and respiratory symptoms in patients with Covid-19, including those with severe disease.
A world slowly coming out of lockdown and a potential treatment for Covid-19 certainly bodes well for 70% of the revenues that FTSE 100 companies receive. However, without a vaccine, once lockdowns end, there are expectations of further waves of the outbreak.
Even if the world lifts all its restrictions and the outbreak does not recur, there will be issues. Millions have lost their jobs. It will take time to recruit them back, and ramp up manufacturing to pre-crisis levels. Some companies will have gone bust, and others will be straining under new debt.
Consumers are unlikely to return to their pre-crisis behaviour immediately. Some sectors might do very well, like clothing retailers, as people make up for months of sitting at home. Others, like travel and tourism firms, might take longer to bounce back; I don’t think people will book more holidays to make up for ones they missed and will be wary of further outbreaks and cancellations.
Previous bull markets started with significant gains for consumer discretionary, financial, industrial and materials stocks. When investors back these stocks, which typically decline substantially in recessions, it is a vote of confidence that the economy is recovering.
The 16% gain in the FTSE 100 so far looks to have been supported by the performance of healthcare, utilities and consumer staple stocks. These are defensive stocks and buying them is hardly a vote of confidence in the state of the economy.
Is the bear market over?
I don’t know if the bear market is over. But that doesn’t mean I am changing my investing plan. I invest regularly and for the long term. Normally I am buying increasingly expensive stocks. A bear market offers the chance to buy stocks that are getting cheaper, lowering my average purchase price. But those stocks have to be in well-run companies, that can likely survive and prosper for years to come.
What I do know is that bull markets last longer and deliver more in gains then bear markets take away. I am more concerned with participating in a bull market, whenever it begins than avoiding a bear one.
