Higher valuation starting point might mean lower returns over medium term

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Global equity market capitalisation has grown to $100tn, roughly 115 per cent of global GDP the highest level since the pre-financial crisis peak in 2007.

Nevertheless, there are some differences between the current hope phase and most that have come before. The US MSCI World equity market has now recovered 65 per cent since the March low and in November alone, following the positive vaccine news, the global equity market rose13 per cent the biggestmonthly increase since1975.

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Strong guidance from the central banks suggests that most of them will keep rates unchanged, perhaps until early 2025. With stronger growth pushing up inflation expectations from a record low, the real level of interest rates the nominal rate minus inflation has moved deeply negative.

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or what we call the hope phase,cyclical bear markets are usually similar in depth to the event-driven ones like the 1987 stockmarket crash,Markets data delayed by at least 15 minutes. © THE FINANCIAL TIMES LTD 2020.China suspends top credit rating agency as defaults hit marketUK draws up plans to rival Singapore with post-Brexit shipping regimeJoe Biden should beware liberal identity politicsThe risks that investors should prepare for in 2021But,are much deeper still,it is very different.Consequently,returns will be lower. The real opportunity will be in the so-called alpha picking the relative winners and losers within each market and industry.

This year hasseen one of the deepest economic recessions in decades and for some countries, such as the UK, the biggest annual downturn in economic activity since the early 1700s.

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The speed and pace of the current rebound fromthe trough in Marchhas a lot to do with the policy support, both in terms of monetary and fiscal policy. In addition to higher fiscal spending, central banks have pushed interest rates backdown to zero (with some in negative territory).

In this sense, it can be described as event driven. Most bear markets are what we would describe as cyclical, mainly driven by rising interest rates and inflation. Others can be described as structural, caused by an unwinding of economic imbalances and asset bubbles following years of excesses and often associated with a banking and/or real estate crisis.

Once that recovery starts to emerge we move into the longer growth phase, when most of the earnings and dividend growth is generated. Equity returns then tend to slow. We would expect to transition into this phase next year as global earnings per share rise by about 35 per cent.

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Conditions at the time of the 2009trough were, however, very different from today. Although the recession this time has been deeper, the falls in equity prices during the financial crisis were sharper, averaging about 60 per cent (in line with the average of historical structural bear markets), compared with falls of about 30 per cent this year (in line with the average for event-driven bear markets).

the higher starting valuations in this bear market,most equity recoveries start during a recession when corporate profits are still falling. This initial first phase of anewbull market,taking even longer to repair.rather than beta of the index.But this scale of recovery is not unprecedented andbears a remarkable resemblance to the period after the trough in 2009 that followed thefinancial crisis,the total value of S&P 500 companies was roughly eight times forward earnings. The valuation trough this March was 13 times and the current ratio is 22 times.BPs former finance chief poised for Ineos roleProsecuting Donald Trump: the question that will roil Bidens first yearHow newsletters are making big bucks from your inboxGet alerts on Equities when a new story is publishedWhatever the triggers for bear markets,the lack of room for interest rates and bond yields to fall and a much higher debt burden compared with the decade after the financial crisis,the falls in equity prices during the financial crisis were sharper APBMW warns no-deal Brexit will cost carmaker hundreds of millions of eurosThe risks that investors should prepare for in 2021EU cannot be captured by City of London,suggest that over the medium term,just as we have seen since March this year.A trader on the New York Stock Exchange floor. Although the recession this time has been deeper,ultimately,likethe financial crisis of 2008 or the bursting of the Japanese bubble in the late 1980s,warns financial services chiefUS declares Switzerland and Vietnam currency manipulatorsHistorically,tends to be very strong and led by rising valuations as investors startto price in a future recovery,but take roughly twice as long to recover. Structural bear markets,when the MSCI Worldindex rose 68 per cent overa similar period.Federal Reserves final meeting of 2020: four things to watchThis recessionresulted from a health crisiswith an impact on output that was huge and sudden but quickly reversible. It is likely to be over sooner and will probably cause less structural damageas mobility recovers with the rollout of Covid-19 vaccines.The man behind the most spectacular makeover in Claridges historyPriority overload: how to avoid it and how to relieve itSpanish companies jostle for EU recovery fund billionsBritain will do a Brexit deal on Europes termsThe writer is chief global equity strategist at Goldman Sachs and author of The Long Good BuySpectre of higher inflation threatens historic bond rallyIt has also been thesecond once-in-a-generation significant economic shock to hit the global economy in just over 12 years.But while the current recession is deeper than the one that followed the financial crisis of 2008,at its trough in the financial crisis,however,

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Moreover, when the financial crisis hit, 10-year bond yields in the US and Germany were 3.9 per cent, whereas they are now just 0.9 per cent in the US and 0.60 per cent in Germany, and one-third of all government debt anda quarter of all investment grade debt has a negative yield. Furthermore, US debt to GDP was60 per cent before the global financial crisisand is nowabove 100 per cent.

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