by Denise Chisholm, Director of Quantitative Market Strategy, Fidelity Investments
Much like the last few weeks, we’re back with another sentiment indicator – and another contrarian takeaway. Some of my favorite indicators are free and available to anyone. Google Trends is one of them. Since “Google” became a verb, it’s been a remarkably clean window into how headline risk bleeds into everyday consciousness. Right now, Google searches for “recession” are near all-time highs.
The data only goes back to 2004, but a clear pattern emerges: the more “recession” creeps into public attention, the more likely the stock market is to be higher over the next 12 months. Said differently, once we’re here, it’s usually too late to be bearish – at least if you are taking a longer-term view.
Now the obvious objection: some of these spikes in recession searches have aligned with real recessions – like 2008 - where stocks dropped sharply. Could we be on the verge of a “catch up” trade where stocks fall to match the level of perceived risk? History suggests that’s unlikely. In fact, the opposite is more common.
One of the oddities in this drawdown has been the speed and shape of the correction. Despite all the noise, stocks are barely down over the last 6 months. That’s the historical exception, not the rule, when recession Google Trends are this elevated. But these unlikely occurrences that happen 10-20% of the time have their own pattern. When markets are minimally down with recession sentiment near peaks, forward 12 months returns are even stronger. In the top decile of recession search spikes there are roughly 30 instances – and every single one saw positive returns over the following year. It’s almost like the severity of the drawdown up front tells you how widespread the fear actually is – and how much opportunity might be hiding in plain sight. If the pattern holds, this drawdown may end up being far less extreme than many investors expect.
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