End of a bear market or a bear trap? This is a key question many analysts and investors are asking. Has the stock market finally reached its bottom? Like other major stock market indices, the FTSE 100 rallied last week. But is the market rally sustainable? This is what I’d do now.
Is a recession looming?
The coronavirus, sadly, has affected many people all over the world. In order to fight the consequences of the pandemic, many governments have had to impose unprecedented restrictions. Thus, many offices and factories are now closed and most people must stay at home.
Not only did this lead to financial market collapses, it also crashed macroeconomic statistics. Many people are unemployed, no physical output is produced, and no services are provided. The level of consumption has substantially decreased as well, worsening the overall outlook.
All these factors have affected most companies’ earnings. Moreover, some smaller companies might go bankrupt in the near future. They might be important customers or suppliers for other larger businesses. Many companies may be forced to reconsider their logistics and target markets.
In addition, many businesses will need to get ‘leaner and fitter’ by cutting costs, perhaps by closing or selling non-essential divisions. For example, some companies might ask their employees to continue working from home, thus cutting their rent and other fixed costs.
In my opinion, larger, profitable companies with sound balance sheets and adequate management teams will survive and flourish after the end of the quarantine. They would even take the market share of their smaller, weaker competitors.
Reasons for the bull market to continue
The bear market might be over much sooner than the overall economic weakness. Thus, after the 2008 stock market bloodbath, the FTSE 100 recovered much faster in 2009 than company earnings. Shares tend to be a leading indicator. They will rally immediately after the end of the quarantine. Yet, the fundamental indicators – the earnings – will take longer to recover for the reasons stated above.
Nevertheless, it is unclear when the quarantine will be over. Some health experts say that there might be a second or even a third wave of the pandemic. The stock market’s recovery will pretty much depend on the state of the Covid-19 pandemic. Investors will likely tend to be more optimistic about large-cap stocks.
Should I buy FTSE 100 shares now?
My colleague Peter Stephens wrote a great article about investing £500 per month. It is similar to the dollar-cost-averaging investment method. This involves investing a certain amount of money each month, or any other fixed period, regardless of the stock market news.
In my view, using this method when shares trade at their record highs is not ideal. Yet, now seems to be the perfect time to invest that way since FTSE 100 shares seem to be trading at a discount. It is hard to say whether the bottom has been reached. Therefore, I suggest you refrain from investing your entire savings into the stock market now.
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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.