When fallout from COVID-19’s global spread walloped equities in February and March, financial news coverage showed sentiment—investor and otherwise—plunged. Headlines keyed first on contagion stats and death rates, then on the massive economic impact of worldwide business shutdowns. Fear appeared pervasive—and, in our view, it will likely remain so for some time. The good news: Equities don’t need fear to recede in order to rise, in our experience. Our analysis shows they typically begin to climb higher amid widespread dread. Fisher Investments UK thinks being aware of the fears that typically recur early in a recovery can help investors keep an even keel—and not miss the strong gains that typically arrive early in bull markets (long periods of generally rising equity prices).[i]
One of the most common early recovery fears we have observed in the wake of a bear market (a fundamentally driven broad equity market decline of -20% or worse): that economic growth and equity markets can’t have finished declining if unemployment is rising. History shows, however, that unemployment usually continues to climb after both economic and equity market rebounds are well underway. In 2009, for example, the eurozone’s bear market ended in March.[ii] Its recession, meanwhile, ended in April, according to the Centre for Economic Policy Research, which dates euro area recessions.[iii] But the eurozone’s unemployment rate didn’t start declining until July 2010.[iv] From the March 2009 low through 30 June 2010, eurozone equities rose 43,2%—gains investors waiting to see labour market improvement could easily have missed.[v]
Similarly, America’s bear market ended in March 2009 whilst its recession ended that June.[vi] But the US unemployment rate didn’t begin declining until November 2009.[vii] By the end of October, US shares were already up 28,6% from their low.[viii]
When economic data do strengthen, we have found that fears of a “double-dip” recession—a second downturn cutting short the recovery—often arise. These fears usually involve the idea that another shoe will drop tied to things like government debt. In our review of financial news coverage following the 2007 – 2009 global financial crisis, we found double-dip fears lingered for years in the US, with many commentators saying high consumer and government debt would drive renewed contraction.[ix] The fears proved wrong.
In 2002, a mix of factors contributed to double-dip fears after recession, including concerns about weak initial employment growth and sagging consumer confidence.[x] Corporate accounting scandals like the Enron affair led many to fear you couldn’t trust any firm’s statements.[xi] But the double dip never came.
This time around, the perceived other shoe to drop could again be debt, especially given the large economic rescue packages many governments are enacting globally and the financial press’s increased warnings on corporate debt. Fisher Investments UK also thinks it could involve fears of a second coronavirus outbreak, either developing this fall or next year. Investors who will be ready for those fears will likely be better able to remain disciplined if and when they arise.
Another common early recovery fear we have observed: the “L-shaped recovery”—a weak rebound whose strength pales compared to that of the downturn, forming an “L” on a chart rather than a “V.” After the 2008 – 2009 financial crisis, many pundits we follow warned of an L-shaped recovery, citing fears of a global debt overhang.[xii]
An L-shaped recovery didn’t occur then—and they rarely do. Japan endured one in the 1990s, following the bursting of its enormous equity market bubble.[xiii] The US also experienced one following the 1937 – 1938 recession, when fears of global war quashed a nascent recovery.[xiv] But our research has found that “V-shaped” recoveries—those whose speed and strength approximately mirrors those of the downturn—are far more common.[xv]
V-shaped recoveries breed their own fears, though, with doubters claiming equities are moving too far, too fast compared to economic data or corporate earnings, setting up another fall. But Fisher Investments UK has found that equity prices tend to be based on estimates of a company’s future worth, whilst earnings and economic data show what has happened in the recent past. We think it is thus natural for equity prices to rise before corporate or economic data improve.
The sharp, swift declines typical of late-stage bear markets are scary, so the fears they create can linger well into the next expansion and bull market. But we think investors who give in to those fears can miss out on the strong gains typical of early-stage bulls.[xvi] By understanding the fearful narratives likely to rear their heads around and after market low points, we think investors who need equity-like gains and are comfortable with the associated volatility give themselves a better chance to stay disciplined and meet their long-term goals.
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Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
[i] Source: FactSet, as of 19/3/2020. Statement based on S&P 500 price returns in USD for purposes of expanding the historical dataset, 1/1/1928 - 19/3/2020. Presented in US dollar terms. Currency fluctuations between the dollar and GBP may result in higher or lower investment returns.
[ii] Sources: FactSet, as of 26/3/2020. Statement based on MSCI Europe Index net return with dividends. Bear market low occurred on 9/3/2009.
[iii] Source: Centre for Economic Policy Research, Euro Area Business Cycle Dating Committee, as of 27/3/2020.
[iv] Source: Eurostat, as of 26/3/2020. Euro area unemployment rate.
[v] Source: FactSet, as of 30/3/2020. MSCI Europe Index return in euro with net dividends, 9/3/2009 – 30/6/2010.
[vi] Source: FactSet, as of 27/3/2020. Statement based on MSCI USA Index return in euro with net dividends. Bear market low occurred on 9/3/2009. Recession dating as per the National Bureau of Economic Research, the official arbiter of US recessions.
[vii] Source: U.S. Bureau of Labor Statistics, as of 27/3/2020. U.S. unemployment rate, 16 years and over.
[viii] Source: FactSet, as of 30/3/2020. MSCI USA Index return in euro with net dividends, 9/3/2009 – 31/10/2009.
[ix] “Beware the Double Dip,” Paul R. La Monica, CNNMoney.com, 18/8/2009.
[x] “Double-Dip Dread—Stocks Socked by Fears of Deeper Recession,” Beth Piskora, New York Post, 3/8/2002.
[xi] “Rumbles of Double-Dip Recession,” Ron Scherer, The Christian Science Monitor, 25/7/2002.
[xii] “Joblessness Threatens Economic Recovery Around the Globe,” Naoki Abe, Brookings.edu, 22/12/2009.
[xiii] Source: FactSet, as of 27/3/2020. Statement based on Japan Nikkei 225 index price returns in yen, 29/12/1989 – 26/3/2020. Currency fluctuations between the yen and GBP may result in higher or lower investment returns.
[xiv] Source: FactSet, as of 30/3/2020. Statement based on S&P 500 price returns in US dollars, 1/1/1937 – 1/1/1941. Currency fluctuations between the dollar and GBP may result in higher or lower investment returns.
[xv] Source: FactSet, as of 27/3/2020. Statement based on MSCI World Index returns with net dividends in euro.
[xvi] See note i.