Strong rallies in the FTSE 100 should not lure investors into jumping wholeheartedly back into the equity market, financial experts warned on Wednesday, as experience from previous crises show these can potentially be “bear traps”.
On Tuesday, London’s blue chip index enjoyed its biggest ever points rise on a single day, in what was also the second-best day in its history in percentage terms.
This came are some growing signs of stabilisation, some analysts noted, though the large one-day ‘bear market bounce’ was against the recent narrative, said Neil Wilson, chief market analyst at Markets.com.
“You get these kind of mega-rallies when the market is heading lower… I’d prefer to see smaller daily swings to believe that stabilisation, or even a market bottom, has been established.”
Sparking the positive move was a range of stimulus measures unleashed by central banks and governments around the world, with the latest being the monetary bazooka from US Federal Reserve on Monday and the $2tn fiscal package from Congress on Tuesday.
“The stimulus is now by and large in place, the question is whether it’s enough for the markets or whether the expected spike in cases and deaths in the US and Europe, combined with the emerging picture of the economic damage, means we need to take another leg lower before the bottom is found,” Wilson said.
The FTSE 100’s rise provided some welcome relief after a month-long drubbing but, said Russ Mould, investment director at AJ Bell, “investors will still need to tread carefully”.
History, most recently in 2008, proves that the market can provide false dawns – many of them.
“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 deeper hit to global economic activity – than currently hoped,” Mould said.
Six of the Footsie’s ten single-largest percentage daily gains of modern times came between September and December 2008, though the index kept on falling and only reached its eventual bottomed in March the following year.
This meant some of these one-day gains were followed by falls of nearly 30% as other events unravelled.
Analysis of the FTSE’s three other previous bear markets, in 1987, 1998 and 2000-03, shows many more sharp rallies, that Mould notes “cruelly turned out 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”.
On Wednesday, the FTSE was up again, led by strong rises for JD Sports Fashion PLC (LON:JD.), M&G PLC (LON:MNG), Royal Bank of Scotland Group PLC (LON:RBS), easyJet PLC (LON:EZJ) and Phoenix Group Holdings PLC (LON:PHNX).
Showing pain after taking part in the previous day’s rally, likes of Melrose Industries PLC (LON:MRO) and Imperial Brands Group PLC (LON:IMB), Land Securities Group PLC (LON:LAND) and BT Group PLC (LON:BT.A) were among the biggest fallers on Wedneday.