Bear markets usually see multiple false start rallies before the bottom is actually reached.
The FTSE 100 rose by 9.1% yesterday (24 March), its second best day on record, according to data from Refinitiv.
The rally has continued today (25 March), with the FTSE 100 up roughly 5% (at the time of writing, 9am). The blue-chip index is now at its highest level in almost two weeks.
Among the best performers were miners and oil companies, both of which had been among the hardest hit since the start of the market declines.
There are several reasons behind this renewed optimism from markets. First, Italy recorded a smaller increase in coronavirus cases for the second day in a row, suggesting measures to contain the outbreak of the virus are helping.
Most importantly, however, was the US Senate finally agreeing on a fiscal stimulus plan to counter the economic impact of coronavirus. Worth 9% of US GDP (as measured in 2019), the plan includes loans and support for businesses, a direct payment of $1,200 to Americans not deemed "higher-earners" and an increase in unemployment benefits. On Monday (23 March), the US Federal Reserve also announced unprecedented measures to support the US economy, including unlimited quantitative easing and lending directly to non-financial companies.
US markets clearly welcomed all this, with the S&P 500 staging its largest rally in 12 years, gaining almost 10%. Meanwhile, the Dow Jones saw its biggest gain since 1933, with gains of over 11%.
Meanwhile, Europe’s Stoxx 600 gained 8.4%, its third-best day on record, partially on the back of European finance ministers seeming to agree to a plan to let countries borrow roughly 2% of GDP from an emergency fund to deal with the crisis.
So with stocks around the world extending historic rallies, is the worst of the coronavirus market turmoil behind us? History would suggest not, with previous bear markets often seeing false start rallies multiple times before the bottom is actually reached.
As the table below shows, yesterday’s rally on the FTSE 100 was the second best on record. All the other best days, however, were in late 2008 during the midst of the financial crisis turmoil. It wasn’t until March that markets finally found the bottom and staged a sustained rally.
The story is similar in the US. The Dow Jones managed to gain 12.3% on 30 October 1929, shortly after the initial start of Wall Street Crash. The market saw several more double-digit gain days in the 1930s that were soon wiped out. For example, on 6 October 1931, US president Herbert Hoover announced a plan to deal with the solvency of the US banking system, resulting in the Dow rallying by a whopping 14.9%. The crisis, however, was far from over.
Likewise, during October 2008, the Dow saw two separate days when it rallied by above 10%. Again, the bottom the still a few months away.
Each market is, of course, different. However, owing to the unpredictability of the coronavirus and the fact that it is still spreading at a rapid pace globally, yesterday’s gains may go down in history as another false start in a longer bear market.