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Many investors worry about when the economy will return to pre-pandemic activity levels, usually using letters like “U” and “L” to paint dreary pictures of what a painstaking recovery will look like. But the time it takes for GDP, employment or any other economic indicator to reach its previous high isn’t really a factor for stocks—which typically lead them all. Fisher Investments believes focusing on such backward-looking criteria won’t help you navigate markets. Here is why.

Bull markets in general begin before recessions end, and they often extend their gains before economic indicators recover their old highs. Exhibit 1 shows several widely watched economic data series and the time it took for them to reach prior highs after each of the previous five recessions. Real GDP took anywhere from six months to three-and-half years to regain lost ground. Other gauges like nonfarm payrolls, industrial production and housing starts usually took longer. Housing starts didn’t even reach their pre-recession highs following three of the past five recessions.

Exhibit 1: Time to Prior Economic Levels’ Peaks and Bull Market Returns During Them

Source: FactSet, as of 12/14/2020. N/A (not applicable) means the economic series didn’t regain its prior high in the subsequent recovery and, for the S&P 500, there wasn’t a bear market associated with that recession (1980) or that GDP broke even before the bear market ended (2001).

For the most part, as GDP recovered, stocks often surged. But there are some exceptions, including 1980 and 2001—recessions that were unusually short and mild. The S&P 500 rallied during 1980’s economic downturn—there was no bear market associated with it—although stocks peaked late that year, anticipating 1981 – 1982’s worse recession. Though GDP didn’t contract as severely during 2001’s recession, the National Bureau of Economic Research (NBER, America’s official recession arbiter) determined the broad economic decline still qualified as an official recession. Stocks were in a bear market from March 2000 – October 2002 as the Tech bubble imploded and, later in the downturn, accounting scandals including Enron led to the swift passage of Sarbanes-Oxley, which forced markets to price big rule changes in a hurry. It took six years for the S&P 500 to return to prior highs.

After more run-of-the-mill recessions, the S&P 500 rose strongly before widely watched economic indicators hit prior peaks. Although 2020’s recession is unique—severe, but seemingly swift—the S&P 500’s fast rebound isn’t. Neither is the potential for a longish trip back to prior economic heights. For investors, the point is to be invested during bull markets—critical to reaping stocks’ long-term returns. If you are waiting for economic indicators to break even, you may be missing out on those returns.

To emphasize this, see stocks’ lead over late-lagging employment. Pundits often claim high unemployment hinders stocks, but the disconnect between soaring stocks and “jobless recoveries” is striking. Bull markets on average started four months before job gains began to overtake job losses. It then took about 17 months on average before nonfarm payrolls returned to prior peak levels—with stocks rising throughout. Similarly, a high unemployment rate hasn’t prevented stocks from rising. (Exhibit 2) When unemployment eventually returns to pre-recession levels, stocks are normally well into bull market territory.

Exhibit 2: “Jobless Recoveries” Don’t Hinder Bull Markets

Source: Federal Reserve Bank of St. Louis, as of 12/14/2020. U-3 unemployment rate, January 1950 – November 2020. Bear markets based on S&P 500 peak-to-trough periods when negative price returns exceeded -20%.

The simple reason stocks’ returns don’t align with broad economic data: Stocks aren’t GDP—or any other individual econometric. Stocks are slices of ownership in publicly traded corporations, entitling holders to a share of future earnings. GDP, in contrast, attempts to tabulate all past economic activity—public and private—including government, nonprofits, small business and sole proprietorships. Moreover, it is open to interpretation. For example, GDP treats all imports as negative—an accounting quirk to avoid double counting consumer spending. But higher imports could be a sign publicly traded retailers are doing great. GDP also counts all government spending as positive, without considering the possibility that at least some of it could be crowding out private investment.

According to Fisher Investments’ research, GDP and other economic measures don’t reflect what stocks are mainly focused on: the economic and political factors affecting corporate profits over the next 3 – 30 months. Based on our analysis, stock prices move mostly on the gap between investor expectations and reality. Backward-looking statistics can have some impact on investor sentiment—which helps set expectations. Sentiment influences how much investors are willing to bid up stocks, and whether they are likely to be positively surprised—or disappointed—by future events. But we think that is about the extent of it.

In our view, long-term returns come from basing your investment decisions on stocks’ fundamental drivers. Rather than waiting for widely followed, lagging indicators to breach an arbitrary prior level, we suggest looking forward—like stocks do.

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] Source: Global Financial Data, Inc., FactSet and Federal Reserve Bank of St. Louis, as of 12/14/2020. Statement based on S&P 500 price returns and nonfarm payroll troughs, October 1945 – December 2019.[i] Source: Global Financial Data, Inc., FactSet and Federal Reserve Bank of St. Louis, as of 12/14/2020. Statement based on S&P 500 price returns and nonfarm payroll troughs, October 1945 – December 2019.
[ii] Source: Federal Reserve Bank of St. Louis, as of 12/14/2020. Statement based on nonfarm payroll troughs to prior peak levels, October 1945 – December 2019.

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