Market briefing – 19th May 2020

Markets have enjoyed a strong recovery, particularly in the US, and perhaps to an extent that we might not have expected. For the foreseeable future, returns from cash and government bonds look likely to be subdued.

Equity market valuations are not looking excessively stretched, although the US is considered fair value by many after a recent strong rally. However, it should be noted that as the Covid-19 pandemic runs its course, markets will have to absorb a great deal of negative news over a protracted period of time.(1)

The FTSE 100 has recovered but that doesn’t mean the bear market is over

Investor positivity about a possible turning point in the battle against Covid-19 has recently boosted various equity indices across the globe. It’s far from an all-clear signal for overburdened hospitals and the economy, but the news has spurred significant stock market activity. Perhaps this suggests we have entered the ‘calm’ phase of this bear market(2).

It is true that the FTSE 100 has rallied somewhat as rates of new cases of the virus and related deaths have slowed in recent weeks in many of the world’s outbreak areas. In fact, as graph 1 shows…

Graph 1 – 23rd March 2020 to 29th April 2020 (Source: FE Analytics(3))

… the FTSE 100 rallied so well, that between the market trough on 23rd March 2020 (in green) and 25 trading days later on 29th April 2020 (in orange), a technical bull market(4) occurred with a return of 22.42%.

However, caution is required here. Over and above the well-known caveat of ‘past performance is no guide to future returns’, a +20% bounce should not indicate that the world or UK investment markets are ‘out of the woods.’

As graphs 2 shows (and as mentioned above), the FTSE 100’s most recent trough came on 23rd March 2020 (in orange) when it finished the day on a price only figure of just above 4675.

Graph 2 – 19th February 2020 to 23rd March 2020 (Source: FE Analytics(3))

However, graph 2 also shows that 9 trading days earlier on 11th March 2020 the FTSE 100 had gone through the technical bear market barrier when it breached the 20% fall from its peak finishing that day with a price only figure of 5496 (in green). The close on 11th March 2020 marked one of the fastest bear markets in the history of the FTSE 100.

2008 and all that…

Similarities between bear markets should be considered carefully as their causes are different. In the case of the most recent, significant bear market, the Global Financial Crisis of 2008 was a structural bear market in the sense that it was triggered by imbalances and financial bubbles(5). We have just experienced an event-driven bear market, caused by the market attempting to price in the impact of Covid-19 and a massive drop in oil prices. Although care is needed, lessons can be gleaned from how the 2008 bear market behaved.

As can be seen in graph 3…

Graph 3 – 3rd October 2008 to 6th January 2009 (Source: FE Analytics(3))

… the technical bear market occurred on 10th October 2008 (in green), with the trough not occurring until around 35 trading days later on 21st November 2008 (in orange).

Whilst the FTSE 100 did recover sharply after the 21st November 2008 trough, as graph 4 shows …

Graph 4 – 3rd October 2008 to 6th January 2009 (Source: FE Analytics(3))

… between the technical bear market on 10th October 2008 and trough on 21st November 2008 the FTSE saw a further decline on 16th October (in green) only to bounce back to another technical bull market on 4th November 2008 (in orange), before it fell back again to its trough on 21st November 2008.

Pulling these graphs together, as table 1 shows, a bear and a bull market occurred after each other in less than 35 trading days, finishing off with a near bear market on 21st November 2008.

Table 1 – 3rd October 2008 to 21st November 2008 (Source: FE Analytics(3))

Possible lessons

We showed above that we had returned to a technical bull market by 29th April 2020 (graph 1). But we should remember that similar events occurred in 2008, i.e. a bear market, followed by a bull market, quickly followed by a near bear market in under 35 trading days. Although past performance is no guide to future returns, the same could happen again and we could be entering a mini drawdown following a positive recovery. Therefore, we should take note of graph 5…

Graph 5 – 23rd March 2020 to 18th May 2020 (Source: FE Analytics(3))

… which shows the recovery to a technical bull market on 29th April 2020 (in green). However, over the last dozen or so trading days the FTSE 100 has fallen just under 6% on 14th May 2020 (in orange) and then – as indicated by the capital ‘A’ – had recovered by 18th May 2020.

Although these numbers are nowhere near the fluctuations we experienced in February and March, they certainly confirm that we are still a long way from where we were on 19th February 2020 when this all began, when the price only figure for the FTSE 100 was 18% higher at 6922.

What should this tell you?

It is true that the short-term horizon is extremely uncertain due to the unpredictability of this situation. However, it is important to remember that we very often have a long-term investment time horizon.

We will continue to monitor the current financial situation and keep you notified of any changes that are made. Please seek professional financial advice if you wish to discuss your financial situation further.


(1) Based on information supplied by Square Mile Investment Services Limited.
(2) A bear market is when a market experiences prolonged price declines. It typically describes a condition in which securities’ prices fall 20% or more from recent highs – Investopedia.
(3) FE Analytics
(4) The most common definition of a bull market is a situation in which stock prices rise by 20%, usually after a drop of 20% and before a second 20% decline – Investopedia.
(5) Goldman Sachs https://www.goldmansachs.com/insights/pages/briefly/bear-essentials.pdf


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