At yesterday’s close, the FTSE 100 dropped by almost 11% from the day before. A 10%+ fall in a single day is one definition of a stock market crash. So, a crash has officially happened. The FTSE 100 saw a double-digit fall for the first time since 1987.
So, what happens now? I think a lot rides on how fast COVID-19 is contained. If it is brought under control quickly, then the hit to companies and the economy will be sharp but short lived. If it isn’t, then a slump can set in, which will take time to shake off. But what’s true for the economy isn’t always necessarily true for stock markets. And I reckon the near future could be one of those times.
Liquidity injection to counter stock market crash
Here’s why. Central banks are pumping liquidity into the system through quantitative easing measures. The Bank of England cut the base rate by 0.5 percentage points (pp) on Wednesday, an action not seen since the financial crisis of 2009. The US Federal Reserve also slashed the fed funds rate by half a pp earlier this month in response to the spread of coronavirus. The New York Fed is ready to provide loans of up to US$1.5 trillion, which can have a positive impact on financial markets. The European Central Bank, too, has announced a series of measures to support the economy.
This coordinated response can lift the stock markets; indeed, it’s already started doing so. At the time of writing, the FTSE 100 is already 7.2% up from yesterday’s close. Admittedly, it’s still far from the highs seen earlier in 2020, but it’s an improvement nevertheless.
Avoid the most affected stocks
This is comforting news, but I’d still be discerning in any purchases I’m tempted to make at current low prices. Not all FTSE 100 stocks are going to bounce back with equal vigour, or at all, for that matter. The Lloyds Bank share price is a good example from the last crisis that started in 2008. It’s been almost 12 years since, but its price has never gone back to pre-crisis levels.
Like financials in the last stock market crash, the biggest losers from the latest crisis will be travel, tourism, leisure, and entertainment companies because of restrictions on being in public spaces. The world’s largest tour operator and FTSE 100 share, TUI, is taking extraordinary steps like freezing pre-payments and recruitments. Similarly, the FTSE 100 leisure travel provider Carnival suspended cruises yesterday.
Consider the gainers
There are others, however, that have the potential for limited share price fall, if not outright gains in this stock market crash. I’m talking about consumer healthcare providers like Unilever and Reckitt Benckiser. At the time of writing, the FTSE 100 is down 26% compared to the start of the year. By contrast, ULVR is down only 6% and RB’s down 10%.
Of course, with a lock-down on the global economy, these companies will also be hit, but with demand for cleaning products on the rise the blow will be relatively soft. They’ve proven their merit over the long term, and I think they’ll hold investors in good stead in the future too.
