Macroscope | As the coronavirus batters economies worldwide, what accounts for the truncated US bear market?
- Despite terrible economic data and a collapse of business confidence indicators worldwide, stock markets have rapidly rebounded from their lows
- Investors seem to be weighing the market’s long-term prospects, based on stimulus measures, rather than voting on short-term risk
Despite being rocked by the economic shock of Covid-19 containment measures, global equity markets and corporate credit have set speed records in their rapid rebound.
Looking at US data back to the mid-1800s, even the shortest equity bear markets (defined as declines of more than 20 per cent) have taken around three months to find a bottom. This year, the US equity market seemed to bottom much faster. It dropped by around a third in just 4½ weeks from mid-February and has since then regained nearly a quarter.
Overall this leaves US (and global) equities down by less than 20 per cent from their all-time highs. Is this sustainable or is it a false dawn?
Markets have seemingly ignored a litany of horrible economic data which leaves little doubt that the world economy is in a deep recession: in the US, roughly 10 per cent of the workforce have already filed for unemployment in just the last three weeks, and the unemployment rate looks like it’s headed for the mid-teens quickly from less than 4 per cent just a month ago. Across the world, indicators of business confidence have collapsed.
How should we think about this disparity between resurgent markets and the miserable real-world impact? Many argue that markets are too optimistic and will need to revisit and maybe surpass previous lows. That is certainly possible, but markets are fundamentally forward-looking in their nature.
