Fisher Investments Editorial Staff

Cloudy With a Chance of Meatballs

By, 06/23/2009

Story Highlights:

  • Many blamed Monday's market pullback on the World Bank's prediction of a nearly 3% contraction in global GDP in 2009.
  • But the World Bank, though "official," isn't inherently any more right than any other prediction.
  • Most importantly, the stock market's V-shaped recovery doesn't depend on the economy doing the same.
  • Having priced in the worst-case economic scenario, stocks should rise in the face of ongoing bad news—the proverbial wall of worry—regardless of what some reports say in the meantime.


Forecasting is a tricky business. Between record-breaking heat in Florida and record numbers of people buying shiny new gadgets, the world's divination experts are finding their crystal balls in need of serious maintenance. So why, given the fallibility of such predictions, was the market seemingly glum on Monday over the World Bank's latest?

The report, predicting a nearly 3% contraction in global GDP in 2009, certainly seems discouraging, and Monday's market pullback was blamed by many on investors' accompanying disappointment. (And this report is hardly "news"—sure, the bank's Global Development Finance Report was officially released Monday, but the forecast was first reported way back on June 11 to little consternation.) Beware lending too much credence to a prediction just because it's presented by an international agency. After all, the World Bank is no more official than the IMF, which let slip they're about to revise their economic forecast upward. Which one should we believe, when neither has been especially prescient over time?

Interestingly, the report contains some signs things aren't as bad as feared. For example, emerging markets economies are still projected to grow this year, albeit at a lesser pace than in years past. Developing economies are still very dependent on external demand. Their stocks bottomed early, and their current boom and projected growth signal their developed customers can't be in as dire straits as folks think. Another factor folks are forgetting: Massive amounts of fiscal stimulus have been pledged worldwide—but only a teensy bit has been put to work. Fiscal stimulus is always clumsy and slow, but more of that massive wave will continue pouring into the global economy—which should prove positive for growth and bullish for stocks.

So take the latest prophecy with a grain of salt. That said, even if the World Bank gets this right, that doesn't mean stocks can't rise. Folks assume stocks won't have a V-shaped recovery if the economy doesn't, but it's not true. In fact, economic news hasn't exactly been rosy, but global stocks have still soared around 40% since the market's March 9 global low. We expect gloomy economic data to continue throughout the year—but remember, economic data is inherently backward-looking. Stocks, however, are forward-looking, and having discounted the worst-case economic scenario, should continue to benefit from an economy not as bad as feared. We don't need a speedy or sharp economic recovery—anything better than the much-expected doomsday should be fine for stocks over time.


*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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