- As 2009 comes to a close, it's a good time to remember good investors look forward, not back.
- Fisher Investments believes continuing pessimism—shaped by main street investors who've yet to buy into this market recovery—is the foundation of the wall of worry bull markets love to climb.
- Second years after a bear market bottom are typically positive and above average (Fisher Investments research).
- The S&P 500 has already regained half the losses from the 17-month bear market—sooner than most would have imagined possible, but also a clear indication we're in the midst of a true V-shaped recovery.
In 1999, as the world prepared to ring in the New Year—and the new millennium—excitement was pervasive. Capitalism was triumphant, business was booming, and Tech was the word. Ten short years later, the US economy is picking up the pieces of a rocky decade—headlines clamor "capitalism is broken," businesses are wounded, and the economy has suffered its second recession in a decade. Many call it a "lost decade"—from which recovery is uncertain. Are we in for a "new normal" of underperforming stocks and a stagnant economy?
Fisher Investments doesn't think so.
Where do we go from here?
As we bid adieu to 2009, Fisher Investments encourages you to remember: Good investors focus forward, not backward. 2010 will dawn on a global economy much stronger than just one year ago. Much of the world's growth has so far been led by emerging markets. There are troubled spots, but it's normal even during periods of robust growth to have country-specific problems—even severe ones. For now, the world overall is projected to grow in 2010.
Stocks began signaling the coming recovery in March. Since then, global stocks have boomed 73% (US stocks are up 69%). Is it too much too fast? Likely not—despite the steep rises, stocks are still cheap by historical standards, leaving room to run. And, according to Fisher Investments research, such big gains early in a bull market aren't atypical. Bear markets end and bulls begin in a V—the steepness and speed of the left side is typically about matched on the right side. A big, bad bear market like we just had should be followed by a big, lengthy recovery.
As far back as we can measure, US stocks have always been positive the second year following a bear market bottom, save 1932 when they fell a scant -0.4% tied to a resurging global recession. In all, second years (which will begin in March) have averaged 15%, with larger returns typically following larger first years. We think the V should continue into 2010, with above-average returns—not as big as the returns of a nascent bull, but still very good.
Another V feature: Those sectors hardest hit in the later stages of the bear typically bounce back most. And they have—Materials, Energy, Industrials, and Consumer Discretionary got bruised most and have bounced most. This feature tends to last 12 to 18 months or more (again, a big bear will have a big recovery). We anticipate this to continue, though evolving some in the quarters to come as fundamental factors take over from the sentiment-driven bounce.
Most importantly, bulls are longer and bigger than bears. We've just had an unusual period where the bear market all but wiped out the previous bull. Could that happen again? Sure, anything can happen. But it's more likely this bull continues to past highs and beyond, as most bull markets do.
While our outlook is positive, don't expect news to reflect that. You will hear repeatedly this year the "lost decade" has ushered in a "new normal." Believing "it's different this time" is common, but that doesn't make it less dangerous. Investors who subscribe to this notion risk missing the market recovery that follows every bear market. Pessimism isn't confirmation the world is too fundamentally broken for stocks to climb—it's the foundation of the wall of worry bull markets love to climb.
Challenges remain in 2010. Financial reform is a potential unknown. An exit from stimulus programs may not be imminent, but its architecture will be discussed and likely add to some volatility. And our dear friends in Washington can be counted on to do what's best for them, not the markets—but that's always true. In our view, the fundamental forces driving stocks this year will swamp all that uncertainty, and we'll see a typically big positive second year following a bear, with enough volatility to keep the wall of worry firmly in place.
The Oughts—A Lost Decade?
While we're eager to move forward, the start of the ‘10s is a good moment to reflect on where we've been. And this decade was anything but boring.
The world didn't end as advertised with Y2K. And three months following that non-event, the exuberance of the Tech boom gave way to a crash. March 2000 marked the decade's first bear. A short, shallow recession followed a year later—March 2001 through November 2001—though the bear market was fairly brutal, ending with a second bottom in March 2003.
A bull market followed for over four years. And, as is typical, a variety of fears failed to derail the bull.
2003: The Iraq War began. Some mutual funds were found to be engaging in overnight trading, which erupted into a major scandal and fears of widespread corruption. SARS was feared to explode into a deadly pandemic. World stocks rose 33%.
2004: The US dollar started tanking, and the whole world feared America's big and ballooning triple deficits—trade, budget, and current account—would drag the world into another recession. It didn't happen. World stocks rose 15%.
2005: Oil was on the rise—hitting a historic $70. Those who believe high oil is bad for stocks braced for a bear market that never came. Then, Hurricane Katrina effectively wiped out a US city, doing billions of dollars in damage, and displacing hundreds of thousands. Global stocks had an OK year—up 9.5%
2006: North Korea started saber rattling in earnest, even testing nuclear weapons. The dollar was weak yet again. The Iraq War entered its third year and things looked bleak. And there was nonstop talk of a US housing bubble. World stocks boomed 20%.
2007: The war in Iraq dragged on as housing bubble fears reached a fevered pitch. Banks who'd made bad bets on subprime loans began raising capital. No one knew it then, but globally, stocks had reached their peak and began grinding down. Still, for the year, stocks rose 9%—besting other similarly liquid alternatives.
By December 2007, the US entered its second recession of the decade and the world followed. Stocks ground slowly down, picking up speed in 2008. With Lehman's failure, stocks began falling in earnest. Though earlier in the year, Bernanke and Paulson hatched late night deals to save AIG and Bear Stearns, they simply let Lehman go—with no explanation for the distinction. A true crisis followed as credit markets froze, exacerbating the recession and what had been a fairly smallish bear.
The decade was bookended by recession, leaving world stocks overall flat—hence the "lost decade." But this implies stagnation—not what we saw. Steep drops were supplemented by significant rises—the bull market of 2002-2007 saw a return of over 150%. Few would've wanted to miss that.
While it's human nature to want to assign meaning to nice round numbers, analyzing stock returns by 10-year periods is arbitrary—it just so happens this period included two big bears. Negative returns over a 10-year period are rare in stock market history. And when they have occurred, they've unfailingly been followed by positive returns.
Fisher Investments MarketMinder Focus: 2009 in Review
Following the 2008 financial crisis, stocks globally hit bear market lows and recession raged. However, 2009 turned out to be quite the comeback kid—with a massive stock market recovery marking the end of the bear market and likely the end of a nearly two-year recession.
This year saw President Obama take office and spearhead the passage of a nearly $800 billion stimulus package. His initial months marked resurgence of bear market volatility. Stocks had been recovering from a November low when uncertainty over the coming bill drove stocks to their March low.
Since then, world stocks have been responding to a global tsunami of monetary and fiscal stimulus—unprecedented in its size and near-coordination. And because stimulus takes some time to be felt (and fiscal stimulus, particularly in the US, isn't fully deployed), the impact should continue for some time.
The recession and accompanying bear market were global in scope and scale, and the recovery is the same. Emerging market stocks have soared—bottoming first in Fall 2008 and bouncing biggest. 2009 returns for Brazil, China, and India will likely finish this year each in excess of 70%. As of this writing, year-to-date returns for the world and US are 30% and 27% respectively. As of this week, the S&P 500 has already regained half its bear market losses—sooner than most would have imagined possible.
As the year ends: The financial system is stabilizing and many firms are sitting more comfortably on large cash reserves, the US economy recorded positive growth in Q3 2009, and global stocks are up significantly since March's bear market bottom.
The US didn't achieve its economic strength through fear and resignation—rather, innovation has been and will continue to be a chief driver, spurring recovery and driving us to new heights. While many say capitalism was dealt a blow in recent years, this isn't so. Capitalism requires busts as well as booms—this is normal. Creative destruction is and will be a vital part of helping capital flow to the most productive areas. But with recession finally behind us, we can enjoy the potential of the decade ahead.
Happy Holidays, and have a safe, peaceful, and prosperous New Year. Thank you for reading Fisher Investments MarketMinder this year, and we hope to see you in the next.
*Source for all data, unless otherwise noted: Thomson Reuters, S&P 500 is total return, World is net return