What a difference a week can make. The sentiment in financial markets has seen a notable shift, and while we are not out of the woods yet, it is improving. One way of gauging the extent of the positiveness (or lack of negativity) is the price of the FTSE 100 index.
The FTSE 100 index comprises the largest 100 companies in the UK, as measured by market capitalization. So in a broader sense, the firms and the index as a whole are a barometer for the health of the economy. Recently, the market crash of over 25% had pushed it into a bear market.
What can we glean from the index’s over 400 point rally this week, and what action points does it present to investors?
Cases down, market up
The shift in sentiment that is pushing the market higher can be seen from several coronavirus headlines this week. Earlier in the week, news came from China that it reported no new virus deaths for the first time. The province of Wuhan ended its lockdown, showing the world that the virus can be beaten.
Later in the week, confirmation came from Italy that the number of new cases there appears to have peaked. While the nation (and economy) is still not in a state of recovery, the news is very encouraging.Â
This was the main driver behind the rally in the FTSE 100 index. This news is not UK-centric, but it has a knock-on affect here. It shows investors and market participants that the virus will likely peak and then recede, something the economy desperately needs. The earlier key sectors such as travel, retail, and leisure can reopen, the better.
Where has bounced the most?
Understandably, the top performers from the past week have been the ones most hit. Airlines and retailers led the charge higher. Take EasyJet, for example. It has seen a share price bounce of almost 23% in the past week. This reflects the sentiment mentioned above. Should the UK follow suit and see a withdrawal of the virus over the next month or so, then the airline carrier will be able to start operations going again.Â
It will not be a quick recovery for airlines, but smart investors look to the longer term. Given that there is light at the end of the tunnel, longer-term investors have piled back into buying these undervalued stocks.
Is this the end of the crash?
It is still too early to call the end of the crash. While we are now a long way from the extreme lows seen a few weeks ago, when the index dipped below 5,000 points, we could see another pullback. This could happen if we see the UK struggle to shake off the virus, or if the lockdown lasts for significantly longer than expected. However, historical market crashes are usually characterized by a V-style recovery, a sharp fall (first half the V) followed by a sharp rally (second half of V). This leads me to believe that while it is not the end of the crash, we have seen the lows.