Bear market brief, uncertainty lingers
By Kyle Tetting
August ended the briefest bear market in history. An especially technical term with multiple methods of measurement, the end of a bear market is a sign that investors have begun to look ahead and move beyond the root causes of earlier market declines. Despite some optimism, though, there is plenty of uncertainty, which can both test investors’ resolve and offer opportunity.
Because measuring is what we do, I’ll note that the S&P 500 spent 33 days in bear market territory and declined 33.9% from the market peak on February 19. Despite dire days during those late-March lows, the market recovered its prior peak within just six months, on August 18. Not only did we transition from bull to bear quickly, but the journey back also happened in record time.
The raw market data offers some certainty, but the economic outlook is cloudy. Record amounts of stimulus in various forms backstopped unemployed workers, small businesses and investors. The effects of the initial stimulus have waned even as the impact of the pandemic continues. The tools for measuring what support is still needed are less precise.
At the economic lows, we had surrendered nearly 90% of the 22.5 million jobs gained since the financial crisis, according to data from Automatic Data Processing Inc. Reopenings from the pandemic have sent many people back to work, but we have yet to recover nearly 12 million jobs. As companies look to pandemic-proof their future, some of these jobs will not return.
While the jobs picture dulls the outlook for the economy, other areas have remained strong. Home sales, for example, have benefited from low interest rates, and home prices have benefited from low inventory.
I should note, of course, that the economy is not the stock market. For a variety of reasons, optimism for stocks may remain detached from concerns about the economy for some time.
For starters, the largest components of the S&P 500 are high-margin businesses with strong balance sheets and little direct immediate exposure to the pandemic. The software, analytical, data storage and internet marketplace businesses that make up much of the broad market indexes can stay detached from slower economic growth for a while; some have even benefited from shifts in consumption patterns exacerbated by the pandemic. In other words, such businesses have not been impacted by COVID-19 the way airlines and restaurants have.
The pandemic is forcing businesses to adapt. In addition to suddenly needing less office space as employees learn to work remotely, businesses are being compelled to reevaluate which employees are critical.
Similar to how innovations in industrial production cut manufacturing employment in the last half of the 20th century, we are in the early innings of a revolution in artificial intelligence and robotics. Lower-skill positions especially are vulnerable to be replaced by computer screens driven by order management systems. Such changes already were coming, but the pandemic is forcing many businesses to speed up development. Resulting gains in productivity will drive those companies’ earnings, but they won’t help the millions of workers still searching for jobs.
We’ve always known stocks and the economy don’t move in lockstep, but the message is even clearer this time around. Although the economy and the market both collapsed swiftly, investors soon found opportunity while the economic recovery has staggered. Such incongruity isn’t unusual. Nearly 50% of the strongest days in the S&P 500 index come during bear markets. Still, the rate at which investors adapted this time was unprecedented.
With political and economic uncertainty on the horizon, investors are well-served to remember that the economy and the markets are not the same thing. In these environments, it’s more important than ever to stick to a plan. We can lean into stocks when they’re cheap and lean away when they’re expensive. We can be a little more defensive when the economy stagnates and a little more aggressive when it takes off again. But, we do so within a framework designed to sustain our portfolios across each of our individual time horizons. We do so trusting that tomorrow will bring a new surprise that we never expected but that we are prepared for, nonetheless.
Kyle Tetting is director of research and an investment advisor at Landaas & Company.
The simple bear necessities, by Kyle Tetting and Joel Dresang
For What It’s Worth: Bulls and Bears
Keeping balance in unnerving times, by Bob Landaas
First time since 2009: Recession, by Joel Dresang
(initially posted September 4, 2020)
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