What will it take for stocks to recover fully?
Looking at bear markets since the 1980s, the team sees a pattern of rebounds before the market typically reaches a trough.
Looking at 19 global bear market rallies since the early 1980s, the team finds that they have lasted an average of 44 days and the average return of the MSCI AC World Index has been 10-15%.
“Given the very sharp falls in investor sentiment over the past few days, it would be typical for there to be a bounce in equity prices,” Oppenheimer writes.
Most bear markets recover fully within a year. Oppenheimer’s team is looking for four signals before it expects to see a sustained rebound in stock prices:
- Attractive stock valuations
- Extreme positioning (investor portfolios signal so much pessimism that a repositioning of their holdings becomes more likely)
- Policy support
- A sense that the second derivative (the rate of change of the rate of change) of growth is improving
In practice, stock valuations are still relatively high by historical standards — especially in the US, where stock market capitalization was at a record-high valuation relative to GDP before the downturn.
Interest rate cuts, which also play a big role in helping bear markets to recover, do not seem to be imminent at this stage. However, our economists think that could change if a recession becomes more likely.
Economic growth momentum seems unlikely to accelerate significantly in the near term, with higher-frequency survey data remaining weak. Additionally, market sentiment and investor positioning of portfolios are shifting towards more negative levels, with Goldman Sachs’ risk appetite indicator registering one of the largest two-day drops since 1991 following the latest tariff announcements.
As mentioned earlier, an event-driven bear market can morph into a cyclical one if it triggers a recessionary outcome in which company profits fall. But the current downturn doesn’t have the characteristics of a severe structural bear market.
“Broadly speaking, the corporate sector has healthy balance sheets and banks are well capitalised. Equally, while equity valuations are high, particularly in the US, they have not been in bubble territory, in our view,” Oppenheimer writes.
“This makes us more confident that this bear market will be more modest in depth and duration than previous structural downturns,” he adds.
What’s the outlook for non-US stocks?
US stocks have consistently outperformed their peers for nearly 15 years, leading to high valuations. But the recent equity declines, which started in the US, reversed this trend.
The downturn was driven in part by falling prices among the largest US technology companies. The sharp falls in some of these tech names resulted in a bigger hit to US stocks than to other global stock markets and indexes.
“For much of the first quarter of this year, other equity markets (unusually) managed to de-couple,” Oppenheimer writes. He adds that non-US stocks were supported by expectations of higher fiscal spending by the new German government and technology breakthroughs in China.
However, non-US stocks also fell recently as the scale of the downturn in US markets became clear and recession fears began to rise.
“Whenever the US has experienced a fall of more than 10%, other equity markets also fall — even if, on occasion, they outperform on a relative basis” Oppenheimer writes.
For now, high US stock valuations amid higher inflation and lower corporate profitability may be a reason for investors to consider international diversification.
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Source: goldmansachs.com
