Market rebound gives us the first rays of hope

Posted by Liz Rees in Latest insights category on 31 Mar 20

News that the US Senate had agreed a US$2.2 trillion stimulus package was well received by investors and triggered a strong rally in stock markets. The S&P 500 gained 9.4% last Tuesday, a daily record, with the MSCI UK close on its heels with an 8.9% advance*.

However, we are not out of the woods yet as the coronavirus (COVID-19) continues to spread and impact our lives and the global economy.

Recession unavoidable

Lockdown measures, so vital to protect our society from the threat of coronavirus, have put the brakes on the global economy and will almost certainly tip the world into recession as global supply chains seize up and consumers are unable to spend.  

The latest economic data, from industrial output to retail sales, has been understandably dismal.  A record 3.3m Americans filed for unemployment and data from other major economies due this week are expected to show a similar picture.

As the economic data comes in, it could mean last week’s recovery may turn out to be short-lived. Such rallies often occur in bear markets, as investors look for positive news only to be disappointed by more bad news. However, whilst this rebound might not be the genuine article, it shows that some investors are already trying to look forward.

How should investors react? 

Each bear market has different drivers so it is impossible to say how long the recovery will take. However, stock markets are forward looking and price in a recession as they see it coming, whilst also pricing in a recovery before it has arrived.

An event-driven downturn, such as we are seeing today, could prove to be more short-lived than a structural one if the radical action taken by governments and central banks succeeds.

Events outside our control, and market sell-offs, have always been part of investing. Last week’s rally is encouraging and it means there is cash on the sidelines and investors who see opportunities waiting to get back into the market. It also suggests that, when there is genuinely good news, share prices could move dramatically.

Now is the time to rely on a fund manager

At times like these, it is hard not to let emotions drive your decisions. Initially, panic sellers off-loaded whatever was liquid and good companies were sold alongside the bad. This has created buying opportunities for experienced investors.

Leave decisions to the professionals who retain a cool head and stick to their process, using fundamental analysis to uncover quality businesses which they expect will survive this crisis in good shape. Why not take a look at our Focus 50 list of Morningstar-rated funds for some ideas.

Time is running out to make the most of your ISA or SIPP allowance before the end of the tax year. You can secure your annual allowance now and invest later when you feel more confident.

*FE Analytics, total return in local currency, 24th March 2020.