Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 358

Which market comes out first in a recovery?

The quickest, sharpest decline in history (-35% in 23 days on the S&P500 index) was followed by the quickest, sharpest rebound (up 30% in four weeks), so the question now is: Where do we go from here?

We have seen some encouraging news of peaks in the pandemic across many Asian and European countries as well as some US states. Many governments are reopening their economies gradually. However, this process will be gradual and staggered, not a straight line.

The recovery will be slow and it is unlikely to be seamless. Moreover, fundamentals are still deteriorating rapidly, and we do not know how bad the economic picture will become. 

Bear markets take time

Since their March 23 trough, most equity markets have retraced at least 50% of their losses. Is this a bear market rally or a V-shaped recovery? We believe that another leg down is likely.

Looking back, history suggests a V-shaped market recovery is rare. Since the 1920s, the S&P500 index has experienced 14 bear markets (as defined by a 20% decline). During these periods, there were 19 bear market rallies in excess of 15% before falling again.

Only one bear market (1932-33) saw markets recover to prior peaks within a year. Historically, it has taken 15 months (on median) for the MSCI All Country World Index to recover to prior peaks after bottoming, and about 20 months for the S&P500, the MSCI Europe and the TOPIX indexes to recover to prior peaks. It took four years after the GFC for global markets to return to pre-crisis levels.

The S&P500 index retracement to about 50% of its losses acted as a ceiling during the dot com crisis and the GFC. Policymakers have been more pro-active and aggressive this time than in the past, which should help shore up confidence and limit the damage.

In our view, markets are being optimistic. The recent rebound is not pricing in the reality of the situation, the risks that still lie ahead, nor the scars left behind. Yes, markets typically front-run economic data, and fiscal and monetary support is massive, but markets cannot ignore fundamentals, both in terms of growth and earnings.

In addition, the ramp up in activity is likely to be much slower than anticipated, suggesting it will take quarters and not months to recuperate output losses. As such and given the ‘quality’ of the rebound so far, we believe that markets will likely see another leg down in the coming months.

What comes out first?

The scale and scope of central bank support makes a strong case for credit markets as a first investment allocation – “buy what the central banks are buying” is a pretty easy adage to follow. Moreover, while spreads did not reach the heights of 2008 levels, they are much more attractive than they have been for some time, offering attractive entry points. We prefer investment grade over high yield, given much more central bank support and less default risk.

Expectations that US growth will hold up and recover better than Europe means earnings should recover quicker, which also supports the US. Emerging Asia should benefit from being first-in-first-out of the crisis and should outperform other Emerging Markets regions.

We are likely to see some long-term legacy from this crisis as well. The de-globalisation trend that began even before the pandemic will be exacerbated as reliance on global supply chains has created vulnerabilities. As such, we expect the repatriation of strategic industries such as healthcare and defence to begin in earnest. Given even bigger reliance on technology, protecting this industry will become paramount.

We believe that downside risks remain and that equity markets are likely to remain volatile and see another down leg. Nonetheless, active managers have the opportunity to take advantage of market dislocations in this environment. In the current context, humility and risk management are key words.

 

Esty Dwek is Head of Global Market Strategy at Natixis Investment Managers Solutions. This article contains general information only as it does not take into account any individual’s personal financial circumstances.

 

  •   13 May 2020
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

After 30 years of investing, I prefer to skip this party

Citi’s Gofran Chowdhury: clients don’t think the worst is over

Six ratios show the market is off the charts

banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

Investment strategies

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Retirement

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

The ASX is full of broken blue chips

Investing in the ASX 20 or 200 requires vigilance. Blue chips aren’t immune to failure, and the old belief that you can simply hold them forever is outdated. 

Shares

Buying Guzman y Gomez, and not just for the burritos

Adding high-quality compounders at attractive valuations is difficult in an efficient market. However, during the volatile FY25 reporting season, an opportunity arose to increase a position in Mexican fast-food chain GYG.

Investment strategies

Factor investing and how to use ETFs to your advantage

Factor-based ETFs are bridging the gap between active and passive investing, giving investors low-cost access to proven drivers of long-term returns such as quality, value, momentum and dividend yield. 

Strategy

Engineers vs lawyers: the US-China divide that will shape this century

In Breakneck, Dan Wang contrasts China’s “engineering state” with America’s “lawyerly society,” showing how these mindsets drive innovation, dysfunction, and reshape global power amid rising rivalry. 

Retirement

18 rules for ageing well

The rules to age successfully include, 'the unexamined life lasts longer', 'change no more than one-eighth of your life at a time', 'nobody is thinking about you', and 'pursue virtue but don’t sweat it'.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.