Anyone who sold out of stocks in either Wall Street or the City of London any time ahead of February may well be feeling a little smug just now.
Equities fell off a cliff in the year’s shortest (and for investors, cruellest) month as it became clear that the coronavirus was not a medical problem confined to an obscure part of China, or even restricted to the Far East, but was threatening economic and social disruption on an immense global scale.
In the UK, the first sign that the authorities were fearful of deep and lasting damage came with the March 11 Budget from the new Chancellor Rishi Sunak. Turning his back on fiscal austerity he opened the fiscal taps to support the economy and, in the next 16 days, produced three more mini-Budgets with further spending commitments.
Overall trend has been down
US President Donald Trump was criticised for allegedly failing to grasp the scale of the problem, but Washington later approved a $2trn stimulus package to support the economy.
None of this seems to have done much to cheer stock markets, as we shall see in a moment. But Monday April 6 marks the beginning of a new trading week, perhaps the week in which matters will turn round. There are some big economic announcements in both the US and UK, and these may influence traders and investors.
On the other hand, everyday politics may eclipse these index numbers, given a presidential election is underway in the US, Britain’s opposition Labour Party is holding a leadership contest and Prime Minister Boris Johnson is trying to hold on to public support for his strategy for tackling the virus.
Before trying to forecast where stock markets may go in the coming week, let’s first look at where they’ve been. There are one or two differences in the performance of the City and Wall Street during the past 12 months, but the overall trend is the same.
Bumping along the bottom?
London’s blue-chip FTSE100 index stood at 5,488.28 in morning trading on April 2, a 0.53 per cent improvement on the previous close. But this uptick let it nowhere near the level of one month earlier – on March 2, it had stood at 6,654.89, while three months earlier, on January 2, it had traded at 7,604.30.
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Go back 12 months, and the FTSE 100 stood at 7,391.12 on April 2, 2019. In other words, the index has lost 25.7 per cent of its value over that period, a colossal destruction of potential wealth.
The venerable Dow Jones index lost 4.44 per cent on its previous close during the April 1 trading session to stand at 20,943.51. One month earlier, on March 2, it had stood at 26,703.32, while three months earlier, on January 2, the Dow had traded at 28,868.80.
Twelve months ago, the index was lower than the January 2020 level, at 26,179.13 on April 2, 2019.
Thus the shape of the FTSE and Dow graphs over the past 12 months are different, but the net effect has been similar – as of April 1, the Dow was 19.9 per cent lower over those 12 months, marginally less of a blow than that suffered by London blue chips but still a major erosion of value.
For the FTSE, the 12-monthly high was back on July 29, when the index stood at 7,686.61, while the low point came on March 23 at 4,993.89. In the case of the Dow, the high was seen as recently as February 12, at 29,551.42, while the low point followed shortly afterwards, on the same day as that of the FTSE, at 18,591.93 on March 23.
Both indices plunged in February, from 7,426.64 for the FTSE on February 20 and from 29,348.03 on February 19 for the Dow.
Looking at the week ahead, therefore, there would seem to be little cause for cheer from studying the charts. The best it would seem that can be hoped for is that stocks in London and New York bump along the bottom and that there is not “another February” lurking round the corner, another plunge in equity prices.
Stock market forecast for next week: pointing forwards, not backwards
It is not hard to be pessimistic about both the week ahead and the medium term. With widespread economic shutdowns, the impact on company earnings will begin to feed through. There will be profit warnings and some corporate closures – indeed, some firms have folded already.
Then there are the economic figures due in the week ahead, some of which could prove ominous. February figures for US job openings and for employment, are due on April 7, and may well reflect the stalling of the US labour-market miracle under the impact of the coronavirus.
In Britain, February figures for gross domestic product (GDP) are due on April 9, and could confirm that the economy was turning down even before the virus.
Yet there are reasons to be cheerful, or at least sanguine, as the new trading week begins. All these economic statistics are backward looking, in that they tell us where economies have been rather than where they are going.
Stock markets have their faults but they have always prided themselves on being leading indicators, pointing forwards rather than backwards. Even the gloomiest predictions have conceded that the virus will eventually be contained and possibly defeated, after which economic life may resume.
Indeed, it may resume more vigorously than before, with an above-average surge in activity representing pent-up demand from the “lockdown” period.
Only two things are certain in equity trading. One is that bull markets do not last for ever. The other is that neither do bear markets.