As Fisher Investments UK Reviews Markets, Bad News Isn’t Inherently Bad for Equities

Based on popular arguments Fisher Investments UK has reviewed in financial publications, many people argue equities require good news – or at least bad news to go away – to rise. Our research shows bad news isn’t inherently bad for equities.

Based on Fisher Investments UK’s reviews of market history, we don’t think equities approach news in terms of being objectively good or bad. Rather, we have found markets are efficient discounters of widely known information, meaning they incorporate broadly discussed news, opinions and forecasts nearly instantaneously. They then weigh those expectations against reality, with a specific focus on economic growth and corporate earnings. Our research has shown equity prices move most on that gap between expectations and reality. In this context, even bad news can positively surprise equities if it is less bad than broadly anticipated or if it is isolated from the economy and corporate earnings.

The 2009 – 2020 global bull market (a period of generally rising equity prices) illustrates this, in Fisher Investments UK’s view.ⁱ Although the bull market began on 6 March 2009 that date didn’t herald a stretch of positive developments. The eurozone remained in recession (an extended economic downturn) through June that year – as did America.ⁱⁱ The eurozone unemployment rate climbed for another 12 months before stabilising, and US bankruptcies spiked.ⁱⁱⁱ Yet global equities returned 49.7% from the bear market low through the end of 2009.^iv

In our view, markets weren’t missing anything. Rather, we think they priced in a poor economic environment during the preceding bear market (typically a long decline of -20% or worse due to fundamental causes). Based on our observations from that period, many widely followed economists forecast a much longer downturn and steep, lasting corporate losses. So as reality turned out to be better than they projected, Fisher Investments UK thinks the positive surprise boosted equities. To see this, consider the corporate earnings of America’s S&P 500 companies, which reflect a large portion of the developed world equity market.^v Q2 and Q3 2009 earnings contracted on a year-over-year basis (-26.9% y/y and -15.8%, respectively).^vi Yet those results were better than analysts’ consensus predictions of -29.6% and -22.6%, respectively.^vii Double-digit earnings contractions didn’t prevent equities from rising in 2009.

Sometimes negative developments can have an immediate impact, but Fisher Investments UK thinks equities price in the fallout quickly and can recover despite ongoing bad news. Take the extreme example of the global bear market that followed the COVID-driven government lockdowns of 2020. Global equities peaked on 20 February and then fell sharply, bottoming on 16 March.^viii We think equities priced in the economic impact of the global economy’s sudden shutdown – which brought worldwide activity to a standstill – and moved on even as more bad news rolled in. Equities entered a new bull market as the pandemic continued, with successive COVID variants weighing on many nations’ health care systems. COVID restrictions roiled many businesses, and economic data turned sharply negative.^ix But these negative developments didn’t prevent global markets from rising 43.7% from 16 March through yearend.^x

Another recent example: the eurozone debt crisis from over a decade ago. Eurozone markets were in a bear market in February – September 2011.^xi That was during the throes of the eurozone’s sovereign debt crisis, and at that time, many financial publications we follow argued the common currency bloc was about to splinter – with Greece leading the way. Yet after bottoming on 22 September when measured in euros, eurozone equities entered a bull market despite ongoing bad news.^xii Greece received bailouts in February 2012 and August 2015, and ongoing drama surrounding Greek politics stirred eurozone exit fears.^xiii The country effectively defaulted twice to private creditors in 2012 and again to the International Monetary Fund (IMF) in June 2015.^xiv It very nearly left the euro after voters rejected a bailout the hard-left government headed by Syriza had agreed on with the EU, European Central Bank and IMF that month. None of that derailed eurozone equities – in Fisher Investments UK’s view, they recognised Greece’s euro drama, whilst bad for Greece, wasn’t going to derail the broader eurozone economy and that the financial backstops in place would likely prevent financial contagion to financial institutions in other eurozone nations.

In Fisher Investments UK’s review of markets, bad news alone doesn’t mean trouble for equities – the context matters. We think this history holds some useful lessons for investors. For example, we think it is beneficial to refrain from projecting a pre-determined outcome, good or bad, from a given event. It is important, in our view, to assess the broader economic and political environment whilst also considering the general sentiment. We think investors also will find use from determining whether a news development is broadly discussed – and therefore likely priced in by markets. Consider, too, whether the bad news in question is sociology or directly related to the economy and future corporate earnings.

This doesn’t mean equities ignore negative developments. And there will be times when bad news is bad for equities, as we think recent events in 2022 show.^xv But that isn’t always the case. As difficult as it may be, we think investors benefit by treating the market as complex and nuanced. In Fisher Investments UK’s view, that approach will likely benefit investors in the longer run.

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