Last week turned out to be the worst for global stock markets since the financial crisis in 2008. This week there has been a rally on the back of investors taking the opportunity to tactically buy equities at low prices but more crucially with central bank and government support or at least the promise of it. The Dow Jones Industrial Average posted its biggest single day points rise in history on Monday gaining 1,294. At 5.1% this was not however the biggest rise in the index in percentage terms. The gains were sparked by anticipation of a US interest rate cut which happened the next day. The FTSE 100 sank to 6,460 on Friday afternoon but at 8.30 a.m. this morning it was up to 6,823 before falling back to 6,732 at 9.13 a.m.
Some commentators have described the rally as a “dead cat bounce,” jargon used to describe a temporary increase in a stock or index in an otherwise falling market. The rally appears to have life in it but it proves to be an illusion and it can be a trap for investors who buy on the hopes of a sustained recovery.
With stock markets all over the place it reminds me of several things. Firstly markets are hypersensitive, overreacting on news and single events. The reality is the underlying economy doesn’t change half as much or half as fast (nor indeed does the cause of the current malaise, the Coronavirus epidemic). Can we say the real prospects for the US economy improved by 5% on Monday? Of course not, especially when on Tuesday the market changed its mind and fell 786 points before flipping on Wednesday to gain 1,173!
Secondly we should remember that investment is different to trading. My clients are invested for the medium to long term and history shows that those who buy and hold generally do very well. The ride may be volatile but equity investment normally proves profitable in the long run. Although a buy and hold strategy is foundational to all good portfolio management I see room for occasional tactical investment to buy equities at low prices from cash. Recently I have undertaken this for a number of clients, a couple of personal pension transfers undertaken before the crash and some ISAs. Naturally there is no guarantee that equity prices will not carry on falling post investment, thereby incurring immediate paper losses. After all it is impossible to correctly call the bottom of the market and the recovery may not be V shaped. It may be U shaped with a long trough or a volatile W shape. However we can be certain we bought in at significantly lower prices than applied prior to the sell-off as well as compared to the market peaks. If the second step is now followed, holding for the medium to long term it should prove profitable in the end.
The content of this blog is based on my own understanding of global stock markets. It reflects my personal views and is intended as general investment information only. Nothing in this article should be construed as personal investment advice for example to invest cash tactically. You should seek individual advice based on your own financial circumstances before making investment decisions.