We certainly know what a market drop has looked like over the last month, with the fastest drop ever in the history of the markets. But what have past recoveries looked like and what might this recovery look like?
If we go back to the five largest declines for the S&P 500 starting with 1929 (which this market drop is nowhere near yet), we know that the average of the five biggest market declines was -60%. If we then look at what happened in the 5 years following those declines, we saw average annualized returns for the S&P 500 of +23.15% per year for the following 5 years after the declines. In each of those five-year periods (25 in total=five market declines with five-year periods after each), only two times did we see a single down year out of all 25.
So what does this mean to a portfolio? If you were able to buy $10,000 of the S&P 500 after any of those declines, the least amount you would have at the end of the following five-year periods was $22,067 after the 2000-2002 drop, and the highest was $46,401 after the 1929-1932 drop.
This is why your advisor was hopefully telling you to stay the course. Better yet, you could consider adding money to the investments once they’re down to breakeven that much faster based on each of those past periods. Of course, as we all know, past performance is no guarantee of future performance, but we certainly have very compelling data to suggest what might happen. Rest assured, there is often a lot more money made in bad markets than there is in good markets by those who understand this information.
When might we begin to see a recovery? While there isn’t really a way to know for sure, I would think it might begin when both infection and mortality rates begin to stabilize throughout the world. Understand that this recovery could very well happen in the middle of the covid-19 virus pandemic peaking in the U.S. If other areas of the world are stabilizing even when our infection rates are climbing, it is possible that the markets could react favorably to this and begin to recover.
Last week I spoke to a group of over 1,000 financial advisors on how to help clients through challenging times like these. I posed the question, “Do you remember what happened on March 9th, 2009, that made the markets begin to rebound so dramatically?” “What was the defining event that began the recovery?” The answer is that there wasn’t one. There was no good news, but rather quite the contrary. All of the news was bad and nothing suggested that markets might begin to turn around. They simply did. From that day on, we began the longest bull-run in the history of the markets and we did so with no compelling reason why. This is exactly why if you are still invested in the equity markets after this recent decline, it would not be advisable to try to get out now. The risk of missing out on the recovery is likely far greater than the risk of losing more money. Yes, the markets can certainly go lower than where they are, but at this point they seem to have far more upside potential than they do downside potential. For that reason, I would suggest that you stay the course.
As always, if you have any questions or concerns about your specific situation, please don’t hesitate to reach out, and I’ll try my best to answer them.
T. Eric Reich, CIMA, CFP, CLU, ChFC is president and founder of Reich Asset Management and can be reached at 609-486-5073 or firstname.lastname@example.org.
Source: Capital Group-Keys to prevailing through stock market declines-2019 S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index. This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS.