Historically bad unemployment, plunging retail sales, awful manufacturing numbers—how could stocks possibly rise amid such disastrous data? That is the question many pundits ponder lately. When stocks climb against this bad backdrop, they say markets are disconnected from the economy, arguing another plunge looms. But Fisher Investments thinks such theories misinterpret how stocks and economic data relate. Economic reports detail the past. But stocks look forward, and new bull markets usually begin amid dreadful data.
Most economic reports examine what has already happened. Unemployment, retail sales, industrial production—government agencies release reports on these and numerous other economic barometers monthly. Other measures, like Gross Domestic Product (GDP), are typically tallied less frequently, in quarterly or even annual reports. It takes time to compile the data. These figures usually don’t become public until several weeks after the periods covered end, adding to their rearview tilt. Preliminary estimates also get revised—often significantly—as months pass. That means data in new reports can be massively out of step with economic realities when released—particularly around inflection points.
That is doubly true of the current situation thus far. Rapid economic lockdowns aimed at stemming COVID-19’s spread caused a steep contraction in mere weeks. “New” data quickly became irrelevant. For example, an initial Federal Reserve release showed US industrial production rose 0.6% m/m in February.[i] But the Fed released that report on March 17—more than halfway through a month in which many factories were shuttered or slowed and industrial production was plunging -4.5%.[ii] Moreover, February’s initial reading was later revised downward to a mere 0.1% gain.[iii]
Unlike most economic data, stocks look forward—which makes perfect sense. Investors buy now to sell for a profit later. Most look at prospects for the coming months, quarters and even years. Fisher Investments thinks stocks generally price a corporate and economic future anywhere from 3 to 30 months or so from the present. How far out stocks look shifts dramatically and unpredictably within that range. But, in our view, stocks always look to the future, not the past. Even this year, the S&P 500 fell -33.8% by its March 23 low—5 weeks before initial data showed first-quarter GDP plunging -4.8%.[iv]
This forward/backward dichotomy is often most pronounced around inflection points—like early bull markets. Forward-looking stocks usually rise before data improve. In 2009, stocks bottomed on March 9, but the US economy remained in recession through June.[v] Most data were negative for the bull market’s first several months. Accordingly, media for months warned the upturn was a classic “bear market rally,” unlikely to persist.[vi] Industrial production didn’t turn upward until July.[vii] US unemployment, typically one of the slowest data series to respond to economic-cycle changes, didn’t peak until October at 10%.[viii] By the recession’s end, the S&P 500 had already risen 36.9%.[ix] By year-end, it was up 67.8%.[x]
Similarly, in 1990, US stocks reached a bear market trough on October 11, but recession continued through March of the following year.[xi] Unemployment didn’t peak until June 1992—nearly two years after stocks started climbing.[xii] Industrial production declined every month from October 1990 to March 1991.[xiii] In late January 1991, headlines asked, “Are Things as Bad as They Look?”[xiv] Economists and pundits feared burgeoning federal debt, a credit crunch and a spillover of German and Japanese economic troubles—all against the backdrop of the US-led Iraq invasion and the savings and loan crisis’s twilight.[xv] But stocks saw beyond the short-term fears. By that month’s end, the S&P 500 was up 17.7% from its low.[xvi] When the recession ended 2 months later, the index had gained 29.1% since the bear market’s end.[xvii] Yet most remained glum and fixated on perceived economic malaise. By year-end, one retrospective argued: “When stock analysts look back at 1991, there’s a good chance they’ll say, ‘huh?’.”[xviii]
The bull market that began in 1982 also started amid woe. It began on August 12, but recession lasted through November.[xix] Unemployment didn’t peak until December.[xx] Industrial production declined through December, too.[xxi] Yet the S&P 500 jumped 35% between the low and October 22. That day, headlines wondered, “What Does Stock Rise Mean?,” and concluded, “not much.”[xxii] By the time the recession ended, the S&P was up 35.3%.[xxiii] This was no disconnect—just stocks seeing a future better than the recent past, as they usually do as recessions progress.
Rising stocks and awful economic data may seem hard to reconcile. But knowing this dichotomy is normal early in bull markets gives you an advantage. While others let ugly data scare them from stocks, you can capture the turnaround’s big early gains.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[i] Source: Federal Reserve, as of 06/11/2020. US industrial production, month-over-month percentage change, January 2020–February 2020. From preliminary 03/17/2020 release.
[ii] Source: FactSet, as of 06/11/2020. US industrial production, month-over-month percentage change, February 2020–March 2020.
[iii] Ibid.
[iv] Sources: FactSet and Bureau of Economic Analysis, as of 06/11/2020. S&P 500 Total Return Index, 02/19/2020–03/23/2020. US real GDP, annualized growth rate, advance estimate for Q1 2020.
[v] Sources: FactSet and National Bureau of Economic Research, as of 06/05/2020. Statement based on S&P 500 Total Return Index and NBER US Business Cycle Expansions and Contractions.
[vi] “Beware the Bear Market Rally,” Ariel Nelson, CNBC, 05/11/2009.
[vii] Source: FactSet, as of 06/05/2020. Statement based on US Industrial Production, month-over-month percentage change.
[viii] Source: U.S. Bureau of Labor Statistics, as of 06/05/2020. US unemployment rate, 16 years and over, October 2009.
[ix] Source: FactSet, as of 06/08/2020. S&P 500 Total Return Index, 03/09/2009–06/30/2009.
[x] Source: FactSet, as of 06/08/2020. S&P 500 Total Return Index, 03/09/2009–12/31/2009.
[xi] Sources: FactSet and National Bureau of Economic Research, as of 06/05/2020. Statement based on S&P 500 Total Return Index and NBER US Business Cycle Expansions and Contractions.
[xii] Source: U.S. Bureau of Labor Statistics, as of 06/05/2020. US unemployment rate, 16 years and over.
[xiii] Source, FactSet, as of 06/05/2020. Statement based on US Industrial Production, month-over-month percentage change.
[xiv] “Are Things as Bad as They Look?,” Charles R. Morris, The New York Times, 01/27/1991.
[xv] Ibid.
[xvi] Source: FactSet, as of 06/08/2020. S&P 500 Total Return Index, 10/11/1990–01/31/1991.
[xvii] Source: FactSet, as of 06/08/2020. S&P 500 Total Return Index, 10/11/1990–03/31/1991.
[xviii] “The Market in 1991—Record Year for Stocks—Northwest Stocks Do Well in Strange Year-End Rally,” Greg Heberlein, The Seattle Times, 01/02/1992.
[xix] Source: National Bureau of Economic Research, as of 06/05/2020. US Business Cycle Expansions and Contractions.
[xx] Source: U.S. Bureau of Labor Statistics, as of 06/05/2020. Statement based on US unemployment rate, 16 years and over.
[xxi] Source: FactSet, as of 06/05/2020. Statement based on US Industrial Production, month-over-month percentage change.
[xxii] “What Does Stock Rise Mean?,” Karen W. Arenson, The New York Times, 10/22/1982.
[xxiii] Source: FactSet, as of 06/08/2020. S&P 500 Price Index, 08/12/1982–11/30/1982.