News

Is this the Real McCoy?

17 April 2009

March 23rd’s surge in the US stock market was the icing on the cake in a fantastic month for investors. Since March 9 the S&P 500 has risen by 22%, prompting many observers to ask whether the bottom of the bear market has finally been reached.

No-one will know until it is too late, of course, but if March 2009 does turn out to have marked the low-point, the sudden about-turn amid a welter of bad economic news will have been typical of the way in which markets tend to move well ahead of any obvious improvement in the business backdrop.

Because market reversals like this are so unpredictable, being out of the market after extended falls can prove extremely costly. Missing the beginning of a new bull market might not matter if the upswing was a steady affair, but history shows that the biggest bang for an investor’s buck is often in the initial months of a rebound.

Bull market or bear market rally?

There has been a rise on this side of the Atlantic too, although a bit more muted than in America. The FTSE 100 index is up 13% since hitting bottom on March 3.

While this is a welcome sign investors will know that they have been here before during this bear market. Since the market peaked in June 2007, there have been four other rises of more than 10%, all of which fizzled out.

Between August and October 2007, the FTSE 100 rose by 15% as investors persuaded themselves that the credit crunch could be contained “over there” and within the financial and property sectors.

Following the collapse of Bear Stearns in March 2008, the market rallied by 18% over two months as hopes rose that this marked the low point of the credit crunch. There was another 10% rally during the summer before the trauma of last autumn’s heavy losses began.

Finally, there was a 15% end of year rally in the lull before it became clear that problems in the credit markets were spilling over into the “real” economy.

Set against these rallies, the latest rise is nothing special and it could go the way of its predecessors, fizzling out when investors find something new to worry about. Equally, however, it could be the start of a new and sustainable bullish phase.

If that sounds obvious – either this is the bottom or it is not – that is because there is simply no way of knowing. Shares are historically cheap but they have been far cheaper at market lows. A lot of bad news is priced into shares, but there could be more to come.

Faced with this kind of uncertainty, there is simply no point trying to time the market to a tee. It is far better to accept that shares are probably somewhere near the low point and to take advantage of historically low valuations to drip-feed money into the market. That is the only way to make sure you do not miss the upturn when it finally comes.

By Tom Stevenson, Fidelity, March 2009