Invesco Canada blog

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Talley Léger | March 12, 2021

How much longer can the ‘recovery’ trade last?

It’s hard to believe that roughly one year has passed since the outbreak of the novel coronavirus (COVID-19). Equally astonishing is the fact that the broad U.S. stock market has kept pressing to new highs, alongside forceful blasts of central bank liquidity and government stimulus checks.

Given such a powerful move in “risk” assets off their early 2020 lows, many investors may be naturally wondering how long the “recovery” trade can last. Should they be selling the rallies or buying the dips?

To answer that question, I looked at the average length of the “recovery” trade across asset, sector, size, style, and regional allocations since the 1980s. Specifically, I measured the number of years “risk” assets (e.g., stocks, cyclical sectors, small-caps, value stocks, and emerging markets) outperformed their “defensive” counterparts (e.g., bonds, counter-cyclical sectors, large-caps, growth stock, and developed markets) from the lows near the last four economic recessions to the highs for each business cycle (Figure 1).

Figure 1: History suggests it’s far too soon for the “recovery” trade to end

Sources: Bloomberg L.P., Invesco, Feb. 16, 2021. Note: Length = number of years passed from recessionary trough to business cycle peak of each ratio. Economic recessions are defined by the National Bureau of Economic Research (NBER) as a significant decline in activity across the economy, lasting more than a few months. The last four recessions occurred in the early 1980s, 1990s, 2000s, and late 2000s. A business cycle is comprised by a recovery and ensuing expansion, bookended by two economic recessions. Stocks as represented by the S&P 500 Total Return Index, bonds as represented by the Bloomberg Barclays U.S. Treasury 7-10 Year Total Return Index, cyclical/defensives measured by the S&P 500 Cyclicals/Defensive Sectors, value as represented by the Russell 3000 Value Index, growth as represented by the Russell 3000 Growth Index, emerging markets as represented by the MSCI Emerging Markets Index, developed markets as represented by the MSCI World index, small caps as represented by the Russell 2000 Index, large caps as represented by the S&P 500 Index. An investment cannot be made into an index. Past performance does not guarantee future results.

Encouragingly, I found that the “recovery” trade in its many forms lasted between four years (in the case of small- over large-caps) and a whopping seven years (in the case of stocks over bonds)!

For those investors who are considering pulling the plug on “risk” assets in general and stocks in particular, the message is simple. History suggests it’s far too soon for the “recovery” trade to end. Indeed, these market trends should be considered in terms of years, not months. If past is prologue, I think “risk” assets should have plenty of time to keep working.

My recent chartbook, Should investors buy the dips?, takes a deeper dive into each aspect of the “recovery” trade, and other reasons why I believe we remain in the early stages of the current cyclical advance.

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Important information
Header image: Andres Valencia / Aurora Photos / Getty

All investing involves risk, including the risk of loss.

The opinions referenced above are those of the author as of Feb. 18, 2021. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

The S&P 500® Index is an unmanaged index considered representative of the U.S. stock market.

The Bloomberg Barclays U.S. Treasury 7-10 Year Total Return Index measures the performance of the U.S. government bond market and includes public obligations of the U.S. Treasury with a maturity of between seven and up to, but not including, ten years.

The Russell 3000® Value Index is an unmanaged index considered representative of the U.S. value stocks. The Russell 3000 Value Index is a trademark/service mark of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co.

The Russell 3000® Growth Index is an unmanaged index considered representative of the U.S. value stocks. The Russell 3000 Value Index is a trademark/service mark of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co.

The MSCI Emerging Markets Index captures large- and mid-cap representation across 26 Emerging Markets (EM) countries. With 1,198 constituents, the index covers approximately 85% of the free-float-adjusted market capitalization in each country.

The MSCI World Index is designed to measure large and mid market capitalization stocks in the developed markets.

The Russell 2000® Index, a trademark/service mark of the Frank Russell Co.®, is an unmanaged index considered representative of small-cap stocks.


Cyclicals = Consumer Discretionary, Energy, Financials, Industrials, Information Technology and Materials. Defensives = Consumer Staples, Health Care, Telecommunication Services and Utilities.