Goldman Sachs Group strategists expect stocks to stage a powerful recovery from their worst sell-off since the 2008 financial crisis, but only after suffering more declines first.
Global equities will likely post a drop of between 20 per cent and 25 per cent from their peak before rebounding, the strategists said. The MSCI All-Country World Index has so far slumped 18 per cent from its February record high through yesterday as fears about the damage from coronavirus and oil price war sent investors rushing out of risk assets.
“At this stage, we think the balance is still more in favour of this being an event-driven bear market, suggesting that the rebound in equity markets will be swift, but from a lower level,” Goldman strategists, including Peter Oppenheimer and Sharon Bell, wrote in a note dated after the US market close on March 9.
While Monday’s market plunge was dramatic, the good news is that bear markets triggered by one-time shocks are milder and shorter than those caused by structural imbalances, such as financial bubbles, or economic reasons, such as higher interest rates, Goldman said.
An event-driven bear market that doesn’t result in a recession on average lasts nine months, compared with 42 months for one that is structural and 27 for the cyclical type, Goldman strategists said. Sell-offs driven by shocks, such as wars or oil price swings, usually see a recovery to the starting point within 15 months in nominal terms, compared with 111 and 50 months for structural and cyclical bear markets respectively.
After rallying 24 per cent in 2019, the MSCI All-Country World Index is down 15 per cent in 2020.