Economic recovery could be nearby or distant, with the duration of the interruptions to business the swing factor. But in either case, stocks will likely see it before almost any pundit or investor.
When will this bear market reach its low? That question hangs over markets with each passing day, in Fisher Investments’ view. The short answer? We don’t know—and we don’t think anyone else does, either. A new bull market may have started before you read this sentence; it may be distant still. But we see essentially two basic paths forward for stocks: Either COVID-19 fades with the flu season—likely mere weeks ahead, allowing restrictions on business to lift soon. Or it lingers longer and restrictions and disruptions to normal business remain in place—increasing the likelihood of recession and delaying the rebound.
One approach advocated by many for slowing the COVID-19 spread is “social distancing.” Time will tell how effective these measures are in moderating the duration and extent of the outbreak. But the economic and social impacts are undeniably meaningful and immediate, in our view. Disrupting travel, concerts, sporting events and meetings means lost business and wasted investment in preparations. Closed businesses or those operating at reduced capacity due to workforce restrictions also pack a punch, including downstream effects. Money a business traveler pays to attend a conference, fly, stay at a hotel, dine out and all the other associated expenses, usually flows to businesses who spend it on supplies, staffing, property and more. Disrupt any of these and you create a reverse multiplier effect, where vanishing spending of one type eliminates other forms of downstream activity. This is what stocks were correctly pricing in by declining into a bear in record time when disruptions began emerging.
Today, many seemingly focus on the downturn’s magnitude. But we think this is far less telling than the duration. Markets aren’t always rational in the short term and can easily overshoot reality on both the downside and upside. If so, the further the overshot to the downside, the bigger the relief rally later, when reality isn’t as bad as feared.
But how long the disruptions to business will last is key. In Fisher Investments’ view, if the coronavirus fades with the flu season, that could allow normalcy to start to return within the next month or so. While no one knows, some experts expect it will. In this scenario, Fisher Investments anticipates the rebound coming shortly, with stocks rebounding powerfully. In this way, the outcome would look a bit like China’s recovery thus far. Officials reported zero new domestically transmitted cases on March 19. Across the country, the trajectory of the illness flattened out some time ago. Makeshift hospitals built to treat the afflicted are now closed. Quarantines, road blockages and business closures are fading into the past. Economic life is gradually returning to normal after a severe short-term shock.
If this scenario extends globally, the economic damage would likely be limited. The sharp downturn we have been through would look more like a correction than a bear market (which tend to be long and grinding). Some economic data would take a short-term hit, potentially a severe one, but whether it would have the staying power for the National Bureau of Economic Research (NBER, the official arbiters of US recessions) to label it a recession is unclear.
However, if it takes longer for COVID-19 to fade and/or the restrictions on business last, Fisher Investments thinks a recession is virtually assured. Many states are only beginning to implement indefinite shelter-in-place, stay-at-home and other lockdown orders, essentially bringing non-essential business to a halt. If this prevented loss of life or spread of the pandemic, then the economic harm may be worthwhile.
But the only thing that seems clear to us is the longer containment efforts extend, the greater the economic damage and the more uncertain the outlook. That would delay stocks’ rebound, but it is critical to note that stocks regularly rebound before recessions end. This is because investors usually overreact out of panic and depress stock prices to irrationally low levels. When reality isn’t as bleak as feared, the positive surprise can send them surging higher, forming the right side of a “V.” Typically, this comes long before there is any clarity about a recession’s eventual end.
While it is impossible to know now how long the economic pain will last, stocks are likely to price in an economic recovery before it becomes apparent—just as they discounted the increasing likelihood of recession in a hurry, before any data confirmed it. In Fisher Investments’ view, the specific cause of this downturn may be unique, but the endgame is unlikely to be.
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.
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