Investing in the stock market this year has been the toughest task for a long time. For several years prior to 2020, the market was characterised by moderate volatility, but with a long-term trend higher. This meant that even by simply buying a FTSE 100 tracker fund, you’d have likely made money. After the stock market crash of March 2020, this changed. The decade-old bull run ended swiftly, and the long-term trend broke down. This raises a very valid question: when will the FTSE 100 fully recover?
What’s a full recovery?
The FTSE 100 index hit an all-time high around two years ago, at 7,877 points. A full recovery from the current situation doesn’t mean that we have to hit new all-time highs. For many, a full recovery would be seeing the market back at the position it was before the crash happened. From that point of view, we’d be looking for around 7,400 points.
Aside from the index level, a full recovery would be called when companies no longer see Covid-19 as having a significant negative impact on revenues. In most of the trading updates for the first quarter that I’ve read, firms have flagged this up. As an example, Carnival Cruises made a gross profit of over $7bn last year, yet expects to make a net loss this year.
Given that the FTSE 100 is a barometer for sentiment in the broader economy, I’d expect the market to have recovered losses when we see economic data improve. At the moment, releases ranging from GDP to unemployment figures make for grim reading. A turnaround in these figures would definitely be correlated to a subsequent rally in the stock market.
When will we see a full FTSE 100 recovery?
In short, nobody knows for certain. However, we can get an idea from what the experts are saying. The Bank of England has updated growth forecasts for the economy. The Bank expects a strong bounce-back in GDP for the second half of this year, but sees it taking almost until the end of next year for it to reach levels seen before the crash.
Looking at the FTSE 100 index specifically, we can examine how long previous falls took to recover. The dotcom crash in early 2000s took around six years to recover, whereas the financial crisis in late 2008 had recovered by 2010. This is a recovery purely in the sense of the FTSE 100 index level, ignoring other elements.
Therefore, it appears as if we could have to wait until at least the end of next year, if not longer, to see a full recovery in the stock market. But is this a bad thing? Well, if you’re a long-term investor like myself, not necessarily.
Just because it may take a couple of years to fully recover, the trend will likely be higher along the way. So investing now at relatively low levels should enable you to make a profit by holding stocks for the next couple of years (and beyond). Two good examples I’d buy right now are CRH and Experian. Click here to find out why.
