In late June, the International Monetary Fund (IMF) revised its global economic outlook, projecting world GDP will contract -4.9% in 2020, down from an earlier -3.0% estimate. [i] Even with a steep 5.4% projected 2021 recovery, the IMF estimates output would remain nearly 6.5% below its January 2020 forecast, made before lockdowns hit the West. This plays right into a commonly held fear Fisher Investments analysts have seen lately: that any recovery, even if one starts in Q3 or Q4 2020, will likely take a long, long time to recoup lost output. This expectation of lingering damage in various datasets contributes to many thinking stocks—which are already hovering near all-time highs—are disconnected from reality. But this misunderstands how markets work, in our view: They care more about growth’s future trajectory than levels like high-water marks.
The “disconnect” concern here isn’t limited to IMF forecasts. In virtually any coverage of economic data showing an upturn, Fisher Investments finds a skeptical caveat usually follows, decrying that the gauge in question remains far below pre-lockdown levels. May’s US employment situation report, for example, shocked economists and analysts by noting that private-sector payrolls rose by 3.1 million. [ii] While acknowledging this positive surprise, much of the coverage hinged on the fact payroll employment remained down by a huge 19.4 million jobs since February’s high. [iii] When May retail sales surged 17.7% m/m—the biggest leap on record—coverage noted they were still down -6.7% from May 2019 and -7.9% below February 2020’s pre-lockdown level. [iv] With the Atlanta Fed’s GDPNow tracker estimating US GDP will plunge at a staggering -45.5% annualized rate in Q2 2020, many think the country will take a long, long time to recoup pre-COVID output levels. [v]
Yet stocks’ relationship to these economic indicators is very loose. Consider past bear markets and recessions. The 2008–2009 global financial crisis, for example, cut 4% from US GDP in total. [vi] Yet US stocks fell an enormous -55.3% peak to trough. [vii] Similarly, the shallow 2001 recession shaved less than 1% from US GDP. [viii] The 1990–1991 downturn sapped 1.4% from GDP. [ix] Yet in the associated bear markets, stocks dropped about -47% and -20%, respectively. [x] There just isn’t any relationship between the scope of a GDP decline and a bear market’s magnitude.
Similarly, markets seemingly don’t care when GDP recoups pre-downturn levels. Following the financial crisis, for example, GDP regained pre-recession highs by Q2 2011. [xi] For stocks, the sheer magnitude of the downturn meant it took longer, with the S&P 500 (including dividends) piercing all-time highs on April 2, 2012. [xii] Meanwhile, in the early 1990s downturn, the S&P 500 regained record highs on February 11, 1991. [xiii] According to the National Bureau of Economic Research—the official body that dates US recessions—America’s economy was still contracting then.
While levels mean little, stocks do typically anticipate the direction the economy is soon to head. Hence, in both the early 1990s and 2009, stocks hit their lows months before economic contraction ended—anticipating brighter days to come. In 2000, Fisher Investments’ research suggests the complicating factors of September 11 and the negative unintended consequences of the Sarbanes-Oxley Act prolonged the bear, causing stocks to fall after economic contraction ended. But that is atypical.
Today doesn’t seem to be as atypical. The S&P 500 began falling on February 19, before lockdowns existed in America and well before any data confirmed the abrupt weakness they would eventually drive. Stocks began rising on March 23. In Fisher Investments’ view, this is likely markets anticipating the economic recovery to come as those lockdowns lift. We are already seeing signs of this in economic data from industrial production and durable-goods orders to the aforementioned retail-sales and employment data.
In our view, history shows there isn’t anything important about the time it takes to recoup pre-recession highs in any economic series. We think stocks care much more about the direction growth is likely to head than they do levels.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[i] “World Economic Outlook Update, June 2020,” Staff, IMF, 06/24/2020. [ii] Source: U.S. Bureau of Labor Statistics, as of 06/25/2020. Change in private payrolls, May 2020. [iii] Source: U.S. Bureau of Labor Statistics, as of 06/25/2020. Change in private payrolls, February 2020–May 2020. [iv] Source: U.S. Census Bureau, as of 06/25/2020. [v] Source: Federal Reserve Bank of Atlanta, as of 06/25/2020. Note: This is an annualized estimate, which means US GDP will not fall by almost half in Q2 even if this proves exactly accurate. It is what the decline would be if that rate persisted for four quarters. [vi] Source: Bureau of Economic Analysis, as of 06/25/2020. Cumulative change in US real GDP, Q4 2007–Q2 2009. [vii] Source: FactSet, as of 06/25/2020. S&P 500 total return, 10/09/2007–03/09/2009. [viii] Source: Bureau of Economic Analysis, as of 06/25/2020. Cumulative percentage change in real US GDP, Q4 2000–Q3 2001. [ix] Source: Bureau of Economic Analysis, as of 06/25/2020. Q3 1990–Q1 1991. [x] Source: FactSet, as of 06/25/2020. S&P 500 total returns, 03/24/2000–10/09/2002 and 07/16/1990–10/11/1990. [xi] Source: Bureau of Economic Analysis, as of 06/25/2020. [xii] Source: FactSet, as of 06/25/2020. S&P 500 Total Return Index level, 10/09/2007–04/02/2012. [xiii] Source: FactSet, as of 06/25/2020. S&P 500 Total Return Index level, 07/16/1990–02/11/1991.
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