Global stock markets may have to "climb out of the pit" for 6 months, but don't panic!

Analysts at Bank of America suggest that it may take six months for global stock markets to recover from the recent sharp decline. The unwinding of yen carry trades (investors borrowing yen at low rates and investing in other higher-yielding markets), coupled with lower-than-expected U.S. employment data, led to the MSCI AC World Index, which tracks thousands of stocks in developed and emerging market economies, falling by 6.4% in three days. Looking back at historical trends, analysts at Bank of America found that over the past 34 years, the MSCI AC World Index has experienced 26 similar instances of three-day declines in the range of 6%-7%. Out of these 26 instances, it took the stock market an average of six months to recover from the losses. In a report on Monday, the analysts wrote, "Following such sell-offs, returns over the next 12 months have been positive 73% of the time, with the MSCI AC World Index averaging a return of 17.9% over the next year. Stocks in the technology, materials, and non-essential consumer goods sectors tend to perform best during these 12 months." They stated, "While market sentiment has weakened recently, the improvement in global earnings cycles and the upcoming easing cycle provide a positive long-term backdrop for the stock market." Despite concerns among investors last week about a possible economic recession, some prominent pessimists are not certain that a recession is inevitable. This includes economist Nouriel Roubini, known as the "Dr. Doom," who stated in an interview last week that despite some signs of economic slowdown, there are still "some strong factors in the economy." Even Claudia Sahm, the creator of the well-known recession indicator "Sahm Rule," mentioned that while the latest employment report triggered this rule, it is not yet a time for panic. In another report released last Friday, analysts at Bank of America warned investors against selling stocks out of panic, as the S&P 500 Index averages more than three declines of over 5% per year. Since the 1930s, if an investor missed the top ten trading days each year, their long-term return would be around 73%, whereas if they did not miss those days, the return could reach 25,000%, emphasizing the importance of staying invested. The analysts wrote, "Panic selling may not be a good idea, as the best days often follow the worst days."