Has the FTSE 100 turned bullish? On March 23, the FTSE 100 crashed to a low of 4,922.76. On Tuesday this week, the index closed at 5,958.5, a 20% rise from the March low. On Wednesday the index closed above 6,000. It is generally accepted that a 20% decline from a high distinguishes a bear market from a correction. Likewise, a 20% rise from a low turns a mere rally into an official bull market. The FTSE 100 is now in bull market territory.
How long will the FTSE 100 bull run?
Bear markets end bull markets. According to investment bank Goldman Sachs a bear market usually removes 68% of the gains made in the previous bull market. The recent decline in the FTSE 100 was around 55%. If that was the extent of the bear market, then it was relatively mild. Moreover, it was one of the shortest on record.
That is surprising given the declines in GDP and employment reported already. Economic activity is starting to pick up in some places, but normality looks way off. GDP forecasts still look bleak. Looking at recent corporate news, we can see bank profits are being crushed and airlines are laying off staff (some are close to bankruptcy).
What I am getting at is that if this new bull market were to run on, it would be unusual. So while the FTSE 100 has met the criteria for entering a bull market, I would not rule out a prolonged period of flat trading or another pullback.
Bull or bear investing
I don’t think investors should waste time worrying about whether this bull market will run on for years, or hit another bump in the road. Time in the market is more important than timing the market. Trying to invest only at the start of long-running bull markets, or trying to sell before a bear market and not invest during one, are examples of trying to time the market.
Unless an investor is exceptionally gifted, what usually happens when trying to time the market is that stocks get sold during bear markets at a loss, and not rebought until markets have gone up a lot, missing a lot of gains. Investors will usually do better by investing regularly, no matter the state of the markets.
Investors are happy to buy stocks when markets are rising; it seems odd to avoid buying them on the cheap as prices are falling. Carrying on investing when markets are falling lowers the average cost of purchases made in the preceding bull market. Investors get more shares for their money when prices are lower. Far from being disasters, a long-term and regular investor should view bear markets as opportunities.
Maybe the FTSE 100 will continue to rise, and perhaps it will not. One thing I am confident about is that investing in a bunch of quality stocks or an index fund regularly and holding for the long term is usually a better plan for building wealth than trying to time the markets.
Views expressed 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.