After falling more than 30% in the stock market crash, the FTSE 100 staged something of a comeback last week, rising 12% over just three days. Even after sharp falls at the end of the week, the UK stock index still finished the week up 6%.
There were some huge gains for individual stocks. The likes of Prudential, JD Sports, M&G, Whitbread, and Intercontinental Hotels Group all saw their share prices rise by over 30% across the week.
Dead cat bounce?
The big question is: is this the start of a recovery in stock prices or is it just a brief respite? I believe it’s the latter. Despite a host of government pledges and initiatives, we simply don’t yet have enough clarity on the likely impact of the virus or how long it’s going to last.
Simply put, this level of uncertainty isn’t supportive of stock prices in the short term. For stock prices to return to normal, we need clear indications that things are going to quickly improve. The message from politicians is clear, that things will get worse before they get better.
I don’t claim to be any sort of expert on viruses or medical matters, but my prediction is that stock markets will continue to be volatile in the near term. Share prices will rise on good news, and fall on bad news, often erratically. It’s likely that there will be more days of 5%+ moves for the major indices. What’s more, this volatility could last a while.
But this needn’t be all bad news. Rather, a prolonged bear market following a stock market crash, provides more opportunities for investors to buy quality stocks at attractive prices. So, don’t panic if you missed last week’s bounce, there will be plenty more opportunities to get into the market.
More haste, less speed
One thing we shouldn’t be doing is simply reacting to erratic moves in the stock market. We shouldn’t be chasing the market back on its way up, through fear of missing out. Any decisions taken at this point are likely to be made in the heat of the moment, without thinking things through rationally.
When investing for the long term, it’s more important to make sure that you are investing in a company that you actually believe in. Don’t just buy a stock because it has lost a lot of value in a short space of time. As Warren Buffett says ”it’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price”.
My advice would be to carry on identifying stocks that look like they could do well in the long term, without rushing to invest. Stock prices are unlikely to just shoot back up to where they were before the stock market crash, so be patient and don’t invest until you are ready. Some of my worst investing mistakes have been where I have rushed to buy or sell, solely in response to stock market movements.
We also need to be aware that things could get even uglier in the short term. But despite this risk, I firmly believe that stock prices in five years time will be well above where they are now, rewarding investors who choose to invest in these uncertain times.