The recovery in the stock market from the March 23 low
has surprised many people. How can the market go up when everything looks so
bad right now? The reason is the market is a “discount” mechanism, meaning it
will look forward as best it can and reflect in today’s current price what it
believes is the outlook for corporate profits say 6, 12, 24 months out. When
the market hit its March 23 low (down 38% from the February high), it most
likely pretty fully “discounted” the current recession. Conversely, the
market’s rise since March 23 most likely reflects investor consensus that the
economy and earnings should start to improve later this year and in 2021.
Morningstar data shows that since 1982, the top three performing sectors in the
one year following the end of a bear market are tech stock funds up 69%,
emerging market up 62%, and U.S. small cap stocks up 56%. This compares with
all U.S. stocks (aggregate) up 41% on average in the one year following the end
of a bear market.
