Could shares be turning a corner or is it just a pause in the sell-off?


Could markets be turning a corner or is this just a pause in the vicious sell-off? This week could give us a clue as to how long the pain will last

The stock market has shown signs of finding its feet this week after the worst sell-off since the 2008 financial crisis.

Today, the FTSE 100 closed up for the third day in a row – climbing 2.2 per cent to 5,815.7 – normally this is nothing notable but in the context of recent experience it is. 

The past weeks have included individual days which saw the biggest falls since the 1987 slump, as investors dumped shares in the face of the coronavirus outbreak around the world.

As what is known as a leading indicator, the stock market points the way to what is likely to come for the economy. Things that are going to happen are often priced into shares before they do. 

The stock market often points the way to what is likely to come for the economy

The FTSE 100 has seen a notable uptick this week after heavy selling since late February

The FTSE 100 has seen a notable uptick this week after heavy selling since late February

It has a good track record of signalling a recession is coming and very effectively forewarned of how bad the virus crisis would be before most of the wider public were fully aware.

The FTSE 100’s recent peak was at 7,675 on 17 January. But the sell-off began in earnest on 21st February and it has broadly been downhill since then, until this week. 

There were a couple of very short-lived rallies along the way before now but they were all quickly reversed.

The chaotic sell-off has broadly knocked a third of the share value off the UK, Europe and America’s entire stock of listed businesses.

Much of the slide took place before it dawned on most people how much lives would change across Europe, the US and around the world.

BEAR MARKETS: THE FTSE 100’S BIG DROPS
Date Peak Date  Trough  Fall 
December 30 1999  6,930  March 10 2003  3,436  50.42% 
October 12 2007 6,730 March 3 2009  3,512  47.82% 
January 17 2020  7,675  March 12 2020* 4,994  34.93% 
April 27 2015  7,103  February 11 2016  5,536  22.08% 
Source: FE Analytics and This is Money    

So, if it’s clear the market sell-off told us the crisis would shortly be escalating here at home, can it tell us when a distant light appears at the end of the tunnel?

It’s impossible to predict anything with much certainty at the moment, but the answer is probably yes.

When we do see the market volatility subside and prices bottom out in a reasonably gradual way over a week or two, it’s a good sign that the epidemic looks likely to be controllable here, even if there are many more tough weeks ahead before that point is reached.

It would also suggest that while a recession is now unavoidable, an end to it can be seen some way down the track.

Investors must be wary of concluding things are back on the up too hastily of course. Bear markets have a habit of delivering a few mini-recoveries that quickly fizzle out before a real one takes hold. 

Aside from the basic fact that shares closed higher for three days in a row – a good sign but nowhere near enough yet – a few key things that the market was desperate for have now happened.

Firstly, the major central banks have moved to ‘unlimited’ QE. In pledging to pump out money for as long as is needed, the Federal Reserve and others have quelled fears of a liquidity crisis in the banking system, for now at least.

THE BIGGEST FTSE 100 ONE-DAY FALLS ON RECORD
Date Daily fall (%)
20/10/1987 -12.22
12/03/2020  -10.87 
19/10/1987 -10.84
10/10/2008 -8.85
06/10/2008 -7.85
09/03/2020 -7.69
15/10/2008 -7.16
26/10/1987 -6.19
11/09/2001 -5.72
06/11/2008 -5.7
22/10/1987 -5.69
Source: This is Money

Then there is the huge commitment on the fiscal side from Chancellor Rishi Sunak here in Britain and a $2trillion package over in the US. 

Similar support across many other European countries is expected to ensure the economic fallout for individuals, families and businesses is greatly cushioned.

The third and perhaps most important factor is progress on the medical side. 

Early indications suggests social distancing is indeed effective in bringing the outbreak under control. 

The tricky part as we have seen, is getting people to stick to it properly for long enough.

Encouraging signs have emerged that various drugs will soon be widely available to treat Covid-19 patients, and the number of available ventilators is quickly being raised thanks in part to manufacturing businesses stepping up admirably. 

There is also recognised to be a good chance a vaccine will be available within 12 months, which would definitively end this scourge.

If these things do hold true we can expect this to be increasingly reflected in the financial markets. 

If the outbreak takes an unexpected turn for the worse however, share prices will quickly tell you that.

 



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