Can markets turn a corner or is this just a break from the vicious sale? This week could give us an idea of how long the pain will last
The stock market has traced this week after the worst sell-off since the 2008 financial crisis.
Today, the FTSE 100 closed for the third day in a row – up 2.2 percent to 5,815.7 – normally this is not noticeable, but in the context of the recent experience it has.
The past few weeks have included individual days, which saw the biggest downturn since the 1987 slump, as investors dumped stocks in light of the coronavirus outbreak around the world.
The stock market, known as a leading indicator, points the way to what is likely to come for the economy. Things that are going to happen are often priced in stocks before they do.
The stock market often points the way to what is likely to come for the economy
The FTSE 100 saw a notable increase this week after heavy sales since late February
It has a good track record of signaling a recession and very effectively warns of how bad the virus crisis would be before the general public was fully aware of it.
The recent peak of the FTSE 100 was at 7,675 on January 17. But the sale started seriously on February 21 and has gone mostly downhill since then, until this week.
There were a few short-lived rallies before, but they were all turned back quickly.
The chaotic sell-off broadly declined a third of the equity value of the entire listed companies in the UK, Europe and America.
Much of the slide took place before most people realized how many lives would change in Europe, the US, and the rest of the world.
|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 that the market’s sell-out told us that the crisis would soon escalate here at home, can it tell us when a remote light appears at the end of the tunnel?
It is currently impossible to predict anything with much certainty, but the answer is probably yes.
If we see that market volatility will decline in a fairly gradual manner in a week or two and prices fall in a fairly gradual manner, it is a good sign that the epidemic here seems likely to be manageable, even with much more difficult weeks ahead before that point is reached.
It would also suggest that while a recession is now inevitable, it can somehow be brought to an end.
Investors should be wary of concluding that things are of course emerging too soon. Bear markets have a habit of doing a few mini recuperations that seep away quickly before a real one gets going.
Aside from stocks closing higher three days in a row – a good sign but not nearly enough – there are now a few key things the market was desperately looking for.
First, the major central banks have switched to ‘unlimited’ QE. In their commitment to spend money for as long as necessary, the Federal Reserve and others have suppressed, at least for the time being, fears of a liquidity crisis in the banking system.
|Date||Daily decrease (%)|
|Source: this is money|
Then there’s the huge stake on Chancellor Rishi Sunak’s tax side here in Britain and a $ 2 trillion package in the US.
Similar support in many other European countries is expected to absorb the economic consequences for individuals, families and businesses.
The third and perhaps most important factor is advancement in the medical field.
Early indications suggest that social distance is indeed effective in controlling the outbreak.
The tricky part, as we’ve seen, is making sure people stick to it long enough.
Encouraging signs have emerged that several drugs will soon become widely available for the treatment of Covid-19 patients, and the number of available fans is increasing rapidly, thanks in part to the fact that manufacturing companies are ramping up admirably.
It is also recognized that there is a good chance that a vaccine will be available within 12 months, which would definitively end this pest.
If these things are correct, we can expect this to become increasingly apparent in the financial markets.
However, if the outbreak takes an unexpected turn, stock prices will tell you quickly.