by Denise Chisholm, Director of Quantitative Market Strategy, Fidelity Investments
One of the hardest realities of investing through negative headlines is knowing that markets often bottom on bad news, not after it. If you sell when risk feels most visible, the obvious problem is figuring out what you’re waiting to buy back on. That tension between visible risk and forward‑looking prices is nowhere clearer than the late 1970s and early 1980s - ironically a period we’re all talking about again. I often ask investors where they think the market low was between 1976 and 1985, and most point to 1982 - the second of two back‑to‑back recessions. It sounds reasonable. It’s also wrong. The market actually bottomed in 1978 - before either recession and before interest rates approached 15%. Yes, there were sharp pullbacks into the recession troughs - roughly 15% in 1980 and 25% in 1982 - but each low held above the last and above the 1978 bottom. In fact, if you had perfect foresight, sold ahead of the downturns, and waited for an “all clear” at the end of the recessions, you would have missed close to 40% in cumulative nominal returns.
Real returns did briefly dip amid the inflation surge into the 1982 low, but overall equities managed to keep pace, and by the end of that recession were already producing positive real returns. That’s not a call to ignore risk – but it’s a reminder that even when economic calls are directionally correct, the market impact isn’t always straightforward. And while equities were cheap in 1982 at roughly 5x earnings, rates were around 15%. Viewed through the relative lens investors actually face - earnings yields versus bond yields - the setup then isn’t as far from today as it might seem, especially after a 10% equity drawdown with rates in the mid‑4s. Different backdrop, familiar pattern.
None of this is to say that conditions can’t worsen, or that a bottom is in - I don’t know. But history suggests that the more visible a threat becomes, the more likely it’s already being discounted. Sentiment shifts quickly, and once concern is widespread, there are simply fewer marginal sellers left on bad news. For investors worried that energy disruptions or supply constraints could linger, it’s worth remembering that markets don’t require conditions to be “good” - they require them to become less bad. COVID was far from resolved when equities bottomed, just as inflation and growth risks loomed well after market lows in the early 1980s. Markets move on second derivatives, not headlines.
Today, sentiment measures aren’t universally at extremes, but the speed of deterioration - particularly in surveys like AAII - has pushed expectations back toward recessionary territory faster than in many past cycles. That doesn’t guarantee higher returns, but historically, when sentiment resets this quickly, forward returns tend to improve as time horizons extend. With appropriate humility - especially given the economic damage energy shocks can cause - it’s worth keeping these patterns in mind. If history offers any lesson, it is that markets discount more than we realize and do so earlier than most expect. Patterns don’t eliminate uncertainty – but they often offer more perspective than headlines.
This information is provided for educational purposes only and is not a recommendation or an offer or solicitation to buy or sell any security or for any investment advisory service. The views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Opinions discussed are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity. Fidelity does not assume any duty to update any of the information.
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