Expect peaks and valleys on the road to economic recovery

The decade-long global economic expansion did not end with a whimper. The coronavirus brought it to a screeching halt. US GDP fell 5.0% in the first quarter, and a steeper decline is likely in the second quarter.

More bad news lies ahead in the short term, starting with the tragic human cost. Historic unemployment will likely have a lasting impact on the economy, and many businesses are failing. The path to economic recovery will depend on the course of the virus and public health response. “I expect a more gradual U-shaped recovery with bumps along the way,” US economist Jared Franz explains. “But, as the economy begins to open more broadly, there will likely be a V-shape in some industries like travel and dining.”

Longer term, there is a silver lining: Because the slowdown was the result of government policy — underlying economic fundamentals were reasonably healthy — a solid recovery is possible, according to Rob Lovelace, vice chairman of Capital Group and an equity portfolio manager. “We can see the other side of the valley, what recovery can look like when policies are relaxed, and that to me is reassuring,” Lovelace says.

Though the shape and pace remain uncertain, a solid recovery is possible

For illustrative purposes only.
sources: Capital Group, Bureau of Economic Analysis, Refinitiv Datastream. As at 31/05/20. Data for the three recovery scenarios are based on estimates from Capital Group economist Jared Franz. GDP: gross domestic product.

 

Market recoveries have been longer and stronger than downturns

Past results are not a guarantee of future results.
sources: Capital Group, RIMES, Standard & Poor‘s. As at 31/5/20. The 2020 bear market is considered current as at 31/5/20 and is not included in the ‘average bear market’ calculations. All other bear market periods are peak-to-trough price declines of 20% or more in the S&P 500. Bull markets are all other periods. Returns shown on a logarithmic scale. Returns in USD.

 

Bear markets are painful, no doubt about it. And when you’re in the middle of one, it feels like it’s never going to end. But it’s important to remember that during the post-World War II era, bull markets have been far more robust than bear markets, and they’ve lasted considerably longer as well.

While every market decline is unique, over the past 70 years the average bear market in the US has lasted 14 months and resulted in an average loss of 33%. By contrast, the average bull market has run for 72 months — or more than five times longer — and the average gain has exceeded 279%.

Moreover, returns have often been strongest right after the market bottoms, as investors learned in the last severe downturn. After the crash of 2008, US stocks finished 2009 with a 23% gain.

Missing a bounceback can cost you a lot, which is why it’s important to consider staying invested through even the most difficult periods.

The long-term power of bull markets is hard to understate. Recoveries are rarely a smooth ride, but investors who can look past the short-term volatility and remain focused on the long-term picture have often been rewarded for their patience.

 

1. sources: Capital Group, RIMES, Standard & Poor’s. As at 31/5/20. Bear markets are peak-to-trough declines of at least 20% in the S&P 500. Bull markets are all other periods. 2020 bear market not included in calculations. Returns in USD.

Risk factors you should consider before investing:

• This material is not intended to provide investment advice or be considered a personal recommendation.
• The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
• Past results are not a guide to future results.
• If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease.
• Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.