Historic Bear Market Recovery Times
Recent fears of slowing growth in China and the continued guessing game as to the timing of a Federal Reserve rate increase has brought added uncertainty and volatility into the markets at a time when tranquility in the financial markets had become somewhat of the status quo.
This increased volatility has led to renewed investor concerns regarding identification of the next bear market. “Bear” markets are defined as drops in the market of 20% of more. They traditionally occur once per market cycle and bring with them feelings of apprehension and insecurity.
According to data compiled by Mark Hulbert of MarketWatch and published in the Wall Street Journal, The Dow Jones Industrial Average has experienced a total of five bear markets since the precipitous stock market crash of 1929. The recovery from each bear market has varied in length, but on average has taken three years’ time to reverse itself assuming the reinvestment of dividends and adjusting for a rise in the purchasing power in the dollar.
Most recently, the recovery from The Great Recession experienced in the late 2000s lasted a little over five years’ time. To put this in perspective, the Dow has risen over 150% since hitting its trough in March of 2009. As evidenced by the above graph, the market recovered in approximately one-third of the time as in 1968 and in sixty percent of the time as in 2000. These recoveries underscore the point that even during the most tumultuous of markets, a reversion to the mean is always in play. Maintaining a balanced portfolio throughout volatile periods will “smooth the ride” while also allowing for growth of capital over the long run. Despite its pullbacks, I believe historically the market has proven to be one of the best places to invest over time.
The following chart from the Guide to the Markets obtained via J.P. Morgan Asset Management shows that volatility in financial markets is hardly a new concept. The chart shows calendar year returns for the S&P 500 along with the maximum decline experienced in the index each year. Maximum decline is defined as the maximum drop from peak to trough each period.
The above chart emphasizes the importance of staying invested when markets begin to pullback. Each dot on the graph corresponds to the maximum decline in a given year, while each bar represents the annual return of the S&P 500. A decline in the market can span from a few days to even multiple months throughout the course of a year. Even though the market has experienced decline in each and every year since 1980, approximately 80% of the time the market has finished positive by year end. As evidenced by this data, staying invested during periods of uncertainty can prove beneficial over the long run. Patience is certainly a virtue when it comes to down markets.
Even though the long term returns of the stock market are appealing, an all equity portfolio is not necessarily the optimal portfolio. It is important to understand that individual bonds can add value to an equity portfolio as well. Adding fixed income instruments to an all stock portfolio can help to reduce risk over the course of a market cycle. For those who are anticipating income needs from their portfolio in retirement, creating and maintaining a balanced portfolio is of vital importance. A small hole in the short term is far easier to climb out of than a large ditch. The graphs below illustrate the value of maintaining a balanced portfolio versus an all equity index during down markets.
If you are willing to stay the course throughout down markets and stick to an allocation indicative of time horizon and risk tolerance, brighter times almost certainly lie ahead.
In The News
(Reuters) – China cuts rates again as growth engine stalls – READ MORE
(Reuters) – Fed hike more problematic for global economy than before: ECB – READ MORE
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Liu, James. Investing with Composure in Volatile Markets. J.P Morgan Asset Management. February 2015. Web. 7 Oct 2015.
Hulbert, Mark. Don’t Fear the Bear. The Wall Street Journal. 7 March 2014. Web. 7 Oct. 2015.