Stocks discounting a better outlook

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.