Ignoring the preceding crash, markets in Europe and the US looked bullish yesterday. The FTSE 100 rose 9.1%, its second-largest one-day gain in history. Across the pond, the S&P 500 went up by 9.38%, and the German Dax ended up 4.08% above where it started the day.
Is a one-day rally enough to call the end of the quickest +20% market crash in living memory?
Has the market crash ended?
Of the top five largest one-day FTSE 100 rallies, four occurred in 2008, during the financial crisis (the other one was yesterday’s rally). The FTSE 100 bottomed in August 2009. The fact is that volatility and bear markets go hand in hand, and you tend to see large upside swings amid a decline.
Purchasing manager indices in France, Germany, the UK, and the US are all in contractionary territory for March. Businesses are not confident at the moment, and why should they be? People are staying at home and are not spending on much beyond the essentials.
Stock markets’ prices should reflect expectations of future cash flows, be they earnings, dividends, or buybacks. Companies, on aggregate, are going to lose revenues and profits. Cash flows will be lower in the immediate future, and so stock market prices have fallen.
What buoyed the markets yesterday was the passing of $2trn stimulus through Congress in the US. Other countries like the UK and the normally fiscally stingy Germany had already announced relief packages. Fiscal and monetary support is essential to keep people employed or provide income to those that lose their jobs. Once things return to normal, people should have money to spend. Supporting businesses through this challenging time means that people have places to go to spend their money when they can, and the economy can recover.
While the recovery may be quicker than it would have been without support, which is a positive for stock markets, when that recovery will start is unknowable. The outbreak has not peaked yet. No one can say with certainty how long the economic disruption will last, how much revenue will be lost, and how low stock prices could go.
In short, I do not believe that the bull market started yesterday.
Should investors avoid the markets?
Investors should remember that bear markets are a relatively short-term phenomenon. In the long term, stocks have historically returned more than bonds or cash. Look at a chart of the FTSE All-share index, including dividend reinvestment. The best prediction for where the index will be in the future is higher.
The long-term investor buys stocks over 10, 15, perhaps 25 years. Most of the time, the buying happens in rising markets, paying more and more for each purchase. The long-term investor should not avoid the opportunity to spend less, and now is the time to do that.
While I have little doubt about calling the FTSE All-Share cheap at present, I cannot say the same for all individual stocks. Some company stocks may be cheap, and some may be traps. I recently bought shares in Fevertree and RELX. After sharp declines in the pair’s share prices, I thought they looked cheap. I can see both companies being around for at least the next decade, and growing larger than they were before the crash started. I think that makes them good long-term investments.
It’s ugly out there…
The threat posed by the coronavirus outbreak has spooked global markets, sending stock prices reeling.
And with the Covid-19 virus now beginning to spread beyond of China and Italy, it seems very likely that the bull market we’ve enjoyed over the past decade could finally be coming to an end.
Against such a backdrop of market worry, it’s little wonder that many investors are starting to panic. (After all, nobody likes to see the value of their portfolio fall significantly in such a short space of time.)
Fortunately, The Motley Fool is here to help, and you don’t have to face this alone…
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James J. McCombie owns shares in Fevertree and RELX. The Motley Fool UK has recommended RELX. 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.