The Motley Fool

Why is the FTSE 100 rallying as the UK heads towards a recession?

Image source: Getty Images

We are all aware of the tragic impact the coronavirus is having around the globe. The need to stay at home has virtually shut down the economy. The knock-on effect is high unemployment, falling GDP and a weaker pound. Few analysts disagree that the UK is heading for a recession, indeed we might actually already be in one.

A recession is defined as two consecutive quarters of negative GDP growth. We have to wait until May 12 to find out the reading for the first quarter of 2020, but it could easily be negative. As for the current quarter, it is unlikely we are going to see the economy grow. Despite this, in the past 30 days the FTSE 100 stock index has rallied over 12%. So why is that? And what does it mean for investors? Have we left it too late to take advantage of quality companies at bargain prices?

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

A health barometer?

Usually the FTSE 100 index is seen as a barometer of how well the UK economy is doing. The stock market gauges investor confidence and general sentiment. If we look at the chart over the past few decades, we can see that it has broadly followed how the economy has performed. For example, when the UK sank into a recession with the global financial crisis in 2008/09, the FTSE 100 fell by around 30%. During the growth years from 2013/19, the index rallied to reflect this.


One of the main reasons why the index is rallying despite us potentially already being in a recession is because it is priced in. This expression is used when the price of an asset already reflects the current situation. For example, if there is a bright yellow jumper which no one wants, it may go on 50% sale. As an investor, we would say the lack of demand is now priced in.

This can be said of the FTSE 100 index. The fall of over 30% in early March reflected the worst-case scenario for the UK due to the implications of the virus. In a way, this drop assumed a recession already, even a depression! The price thus reflected this opinion. So the rally over the past month has come as investors have realised that the worst-case scenario might not actually happen.

The lockdown imposed and the signs around the world of slowing death rates (Wuhan, Italy, Austria etc) over the past couple of weeks have provided optimism in the stock market. The market is still ready for a recession (hence why it is still down over 15% from the peak). But it is nowhere near as bleak as it was a month ago.

My Foolish takeaway

From this, I am doing the following. Firstly, I am not selling any stocks I currently own. If I had sold a month ago then I would have lost out on this rally. Secondly, I am looking to buy stocks which are defensive and could perform well during a recession. Supermarkets and the healthcare sector are good examples here. Yes, those stocks are more expensive today than they were in the depths of crash, but they are still quality companies I feel can grow and reward me once the crisis is over. Finally, I am making sure I keep my finger on the pulse of market sentiment, so I can react quickly whatever happens!

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Jonathan Smith and The Motley Fool UK have no position in any of the shares mentioned. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.