In a recent email sent to my investor group on 19 March, I proposed three different ‘hunting lists’ of stocks to buy ahead of a possible market rally. At that point, the timing may have looked counter-intuitive: we were witnessing a tragic acceleration in the COVID-19 death toll and intensified media hysteria. It was akin to catching a falling knife, something I rarely do. But my real objective was to plant a seed in the minds of investors: helping to discover calculated opportunities amidst the frenzy and panic reported in the media.
That rally materialised far earlier (and stronger) than my expectation. Two working days after my email, the market bottomed and proceeded to generate the sharpest one-month rally for 30 years, with the FTSE 100 rising 15% and the US S&P 500 rising 21%. Whilst the world panicked, the markets went into rally mode.
How, people wondered. Boris Johnson had just instructed us to lockdown. 90% of the High Street would shut down prompting bankruptcies, rising unemployment and an imminent global recession. What was there to be positive about?
That famous Warren Buffet quote “Be greedy when others are fearful” seemed very apt. But more fundamentally, market moves don’t just reflect today’s events and certainly not media headlines. Markets are forever looking ahead to discount the future outlook. During April there were numerous times when headlines such as ‘Record Decline in GDP Ahead’ accompanied another daily gain in the markets.
Markets always looked forward and tend to correctly, more often than not, forecast the future. Look at the chart below to see how the market (FTSE 100) collapsed during the Global Financial Crisis (GFC) of 2007-09. In October 2007 the market peaked then started to fall. This happened well before the collapse of Northern Rock in February 2008, Lehman Brothers in September 2008, and a full year before the recession that started in Q4 2008.
The markets know before we do!
This pattern repeated in the recovery too. The market bottomed in March 2009 - six months and a 32% rally before the UK eventually came out of the recession.