The peaks and valleys of a bear market: Why investors should focus on the long term      

David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — March 30, 2019

Stocks staged a powerful rally last week on hopes that the government’s response to the coronavirus will be enough to keep the economy afloat. The S&P 500® index surged higher by 10.3 percent, including a 3.4 percent decline on Friday, after Washington’s $2 trillion stimulus package, the equivalent of almost 10 percent of 2019 U.S. GDP, came into focus. Coupled with the earlier initiatives of the Federal Reserve to unlock funding markets, investors turned more optimistic that the worst-case scenarios for the economy could be averted. It was just the second positive week for stocks in the past six. The S&P 500 is now 25 percent below its February 19 peak, compared to its lowest point of -34 percent at the close last Monday. 

As welcome as the higher prices are, there remains a level of uncertainty as to whether we have seen the bottom of this bear market. Expected volatility remains extremely high. History tells us that we often see rallies in bear markets that ultimately give way to a retest of the previous low. Whether that will occur in this instance, no one can say. The news in the days and weeks ahead will certainly get worse, as the number of infections continues to rise and the data reflects the economic impact. We saw evidence of the later with last week’s flash PMI reports and weekly jobless claims. And we do not know what the full extent of the economic impact of the virus will be. The second quarter, which begins on Wednesday, is lining up to be the weakest of this downturn.

Long-term investors should focus on the future 

But the fiscal and monetary response has been massive, with the expectation of more to come if necessary. The response overseas in many cases has also been sizeable. By some estimates, a total of $5 trillion in stimulus has been pledged by the G20 countries or approximately 6 percent of 2019 global GDP. What we can say, and perhaps more importantly for investors, is that stocks are far more attractively priced now than they were before the selloff. Long-term investors should stay invested and focused on their long-term goals. And for those so inclined, the pullback has created an opportunity to rebalance portfolios that now may be underweighted in stocks. 

History also tells us that markets need time to fully recover from bear markets, in some cases, more than a year to get back all that they lost. But historically, they tend to recover as the economy comes back to life. And those who took advantage of the lower prices when confidence may have been in short supply are typically well rewarded.

Equity markets around the globe experience sharp declines; The bond market welcomes Fed action

It likely offers little consolation to know that few equity markets around the globe have been spared in the current selloff, although some Asian markets have fared relatively better. In the aggregate, the rest of the world’s markets, as measured by the MSCI All-Country World Ex-U.S. index, peaked on January 17. From that date forward, it is lower by 27 percent in dollar terms. At the regional level, the European index is down 26 percent from its U.S. coincident peak of February 19. At the country level, the German DAX index is down 28 percent. The Japanese Nikkei index had been lower by a similar 31 percent through March 19, but a 20 percent rally last week has improved its relative standing. The MSCI Emerging Markets index is down 27 percent in dollar terms from its January 17 peak. But the worst of the Emerging Market selloff has been felt in Latin America, where the regional index is down 47 percent from its January 2 peak, notwithstanding a modest 5 percent rally last week. The Brazilian Bovespa index is down 51 percent in dollar terms from its January 2 peak, compared to just 38 percent in local currency terms, as the real has depreciated sharply versus the dollar. The MSCI Asia Ex-Japan index is lower by 22 percent from its January peak. The Chinese CSI 300 index is lower by a comparatively modest 14 percent from its comparatively recent March 5 peak. The South Korean KOSPI index, in contrast, is lower by 28 percent, and the Taiwan TAIEX index is down 22 percent. The Bloomberg Dollar Spot index is higher on the year by almost 5 percent, even after a 4 percent decline last week, acting as a headwind for unhedged dollar-based investors in foreign markets. 

Bond markets continued to unfreeze last week, encouraged by the Fed’s various initiatives. Credit spreads narrowed, the ten-year Treasury yield fell from 0.85 to 0.68 percent, and agency mortgage-backed bond yields fell sharply. The yield on ten-year AAA municipal bonds fell by half, from 2.86 to 1.39 percent. Short-term muni yields fell even further. The yield on 30-day commercial paper fell from 1.78 to 1.26 percent. And expected volatility in the Treasury market also moved sharply lower. However, high yield primary markets remained inactive last week.

The economic calendar in the week ahead is full, headlined by Friday’s March employment report. The Bloomberg consensus estimates a loss of 100,000 non-farm jobs and a rise in the unemployment rate to 3.8 percent. But keep in mind, this is payroll data as of mid-March. The full impact of the slowdown will not be seen until the April, or even May jobs report. Perhaps more telling will be Thursday’s weekly jobless claims number, estimated once again to total more than 3 million. Also telling will the Conference Board’s Consumer Confidence index on Tuesday, which is expected to show a sharp decline to levels not seen since 2016. And the March ISM manufacturing report on Wednesday is expected to once again slip into contraction, with particular weakness in new orders.