Investors were warned they should not be lulled into a false sense of security after the FTSE 100 enjoyed the second biggest rally in its history.
On Tuesday the index of blue-chip companies rose by more than 9 per cent, its best performance since the financial crisis more than a decade ago.
In particular, traders chased energy stocks higher as governments across the world intervened to shore up their companies against the threat posed by coronavirus and took draconian steps to isolate their populations.
After big swings in markets over the past fortnight, leading shares rallied again yesterday and the FTSE 100 gained a further 4.45 per cent to close at 5,688.20, although it was a far weaker rally than the previous day.
AJ Bell, the stockbroker, said that Tuesday’s rise had added £113.5 billion to the value of the London market’s biggest companies, its largest rise in history in monetary terms.
Russ Mould, its investment director, said that the gains had brought investors “welcome relief after a month-long drubbing”. However, he warned against complacency, arguing that evidence showed that rallies could be short-lived, to be followed by bigger falls.
“A hefty rise in the FTSE 100 is welcome, should it transpire, but there remains the risk that any such advance proves fairly temporary should news on the viral outbreak continue to get worse and policy measures require a longer lockdown — and potentially a deeper hit to global economic activity — than currently hoped,” Mr Mould said.
Of the ten biggest percentage gains in the FTSE 100 since it started life in 1984, seven took place during the big bear markets of 1987 and during the financial crisis of 2007 to 2009 and were followed by steep falls, he noted. The exceptions came in 1992, when, in April, Britain began to emerge from recession, and in March 2003, as economic output began to recover momentum after the collapse three years previously of the dotcom bubble.
“The FTSE 100 has just entered its fifth bear market in its history. Analysis of the four previous downturns in 1987, 1998, 2000-03 and 2007-09 shows that those bear markets were actually littered with sharp rallies, which cruelly turned out to be nothing more than bear traps for the unwary, who were tempted into a ‘buy-on-the-dip’ strategy, only to quickly find themselves in trouble,” Mr Mould said.
“The sharp and swift 1987 bear market happened so fast that investors only tried one, failed rally before buyers were swept away by Black Monday, October 19, 1987, and then even heavier losses on the following day as London caught up with a 20 per cent single-day fall in New York.”
AJ Bell’s caution comes after the government first ordered bars, pubs and restaurants to close as part of its attempt to restrain the spread of Covid-19 and then subsequently deemed that only essential businesses, such as food retailers, should stay open. The population has been ordered to remain indoors, allowed to venture out only to buy food or to seek medical care or to take one piece of exercise each day.
The crisis has led the Financial Conduct Authority to instruct companies to put their preliminary financial results on hold for at least the next fortnight in order to ensure that shareholders receive accurate updates.
AJ Bell’s analysis showed that nine attempted rallies during the bear market of the last financial crisis all crumbled as more companies warned about their profit prospects and more bleak indicators appeared. During the near-two-year-long downturn, the FTSE 100 lost 3,220 points or 47.8 per cent of its value.
Originally published on thetimes.co.uk, Miles Costello
