Bank of America analysts said it could take six months for global stock markets to recover their recent losses.
The unwinding of the yen carry trade, in which investors borrow yen at low interest rates to invest in other markets with higher interest rates, and weaker-than-expected employment figures in the US led to a 6.4 percent decline in the MSCI AC World Index, which tracks thousands of stocks in developed and emerging markets, in three days.
Looking back at historical trends, BofA analysts found that there have been 26 similar three-day declines of 6 to 7 percent in the MSCI AC World Index over the past 34 years. In those cases, it took stocks an average of six months to recoup their losses.
Following such sell-offs, 12-month returns were positive 73 percent of the time, and the MSCI AC World Index rose an average of 17.9 percent over the following year, the analysts wrote in a note Monday. Stocks in the technology, basic materials and consumer goods sectors tended to post the strongest price increases over the 12-month period.
“Sentiment towards equities has weakened recently, but an improving global earnings cycle and an impending easing cycle provide a positive backdrop for equity markets over the longer term,” they said.
While investors worried about a potential recession last week, some notable bears aren’t so sure a downturn is actually happening. That includes “Dr. Doom” economist Nouriel Roubini, who said in an interview with Bloomberg TV last week that despite some signs of a slowdown, there are “some elements of strength in the economy.”
Even Claudia Sahm, the inventor of the Sahm rule for predicting recessions, said that although it was triggered by the latest labor market report, there was still no reason to panic.
In a separate note Friday, BofA analysts warned investors against panic selling, as the S&P 500 experiences selloffs of more than 5% three times a year on average. Since the 1930s, investors who skipped the 10 best trading days of the year have seen about 73% higher returns over time, compared with 25,000% if they hadn’t missed those days, the analysts wrote. The main message: Stay invested.
“Panic selling can be a bad idea, as the worst days are often followed by the best days,” the analysts wrote.
