The Coronavirus pandemic continues to sweep the globe, investors are worried about economic performance in the near-term, and the stock market is responding accordingly.
The last week has seen two of the worst days for US stocks since the Great Depression. On March 12 the S&P 500 Index fell by 9.5%, and on March 16 it fell by 12.0%. The benchmark index is now down 29% for the year to date. We are firmly in a “bear market”.
Bear markets are periods when the stock market declines by 20% or more from the most recent high. Using the S&P 500 Index as a yardstick, there have been 16 bear markets since 1926, averaging one every six years. On average they last a bit less than two years, and the market’s “peak to trough” decline is about 40%.
Despite these psychologically painful bear markets, the stock market has historically always been up more than it’s been down. Over the 70 years from 1950 through 2019, the S&P 500 Index was up about 54% of trading days and down 46% of trading days, and the percentage of positive days exceeded negative days in every decade.
This Time Isn’t Different
It may well be that we haven’t seen the bottom of this bear market. After all, it’s now widely acknowledged that the US has been too slow and graduated in its response to the fast-spreading COVID-19 virus. So, the market will likely remain volatile for a while, and further declines are not out of the question.
But let’s compare this current bear market to some others:
- During the Great Recession from 2007 to 2009, the S&P 500 Index was down 59% over 27 months
- During the dot com tech crash from 2000 to 2002, the S&P 500 Index was down 49% over 31 months
- During the Black Monday crash from 1987 to 1989, the S&P 500 Index was down 34% over 23 months
- During the oil shock from 1973 to 1974, the S&P 500 Index was down 48% over 21 months
- During the Great Depression from 1929 to 1932, the S&P 500 Index was down 86% over 34 months
The Importance of Staying Invested
Investors who sold at or near the bottom during these periodic corrections suffered significant losses. For those who stayed the course and experienced the subsequent recovery, the experience was probably no less painful psychologically, but the financial result was much different.
When you’re going through a bear market, the challenge is to remain focused on your long-term objectives.
How the Market Recovers
Bear markets are often followed by bull markets. For example, the 2007-09 Great Recession was followed by the longest bull market in history, which only came to an end with this Coronavirus outbreak.
There have been 14 bull markets – defined as an increase in stock prices of at least 20% – since 1930. While bull markets typically last for several years, it’s not unusual for the bulk of the gains to occur during the first few months of the recovery.
For example, after the S&P 500 Index hit its bottom in early March 2009, it gained nearly 9% for the full month of March and an additional 10% in April. Riskier small company stocks rebounded even more strongly, rising 9% for March and over 15% in April.
If you’re an investor wondering whether it might be wise to flee to the perceived safety of cash during a painful market downturn, you should keep in mind the very real cost of missing out on the early stages of the inevitable market recovery.
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