Recovery Periods Following Major Market Declines
March 27, 2020
Long-term investors always have eventually been rewarded for riding out the bad times, even though every bear market looks and feels a little different.
In the chart below, we look at the 21 times since 1950 when there have been significant market declines (defined as a fall of 10% or more in the S&P 500). We compare the depth of the market decline (shown on the x-axis) to the number of years until the market returned to its prior peak (shown on the y-axis). The chart gives us a picture of how long it has taken for the market to fully recover from falls of varying intensity, and allows us to put the current decline in some context.
The data suggests that based on the scope of the most recent decline (34% at its worst so far), we might expect it to take approximately two and a half years for the S&P 500 to return to the peak it achieved on February 19th, based on the historical averages.1
Recovery Time for S&P 500 Declines of 10% or Greater Since 1950:
*based on the daily historical returns of the S&P 500 Total Return Index from 1950 to Present. Data provided by Dimensional Fund Advisors.
It’s times like these that remind us why broadly diversified portfolios work so well in managing risk. During the Financial Crisis, a representative 60% stock / 40% bond portfolio would have lost 30% at its peak and taken 2.9 years to recover its value2, compared to the S&P 500 which would have lost 51% at its peak and taken 4.4 years to recover its value.3 Diversification not only would have mitigated the losses, but also shortened the duration of the recovery window.
The market downturn caused by the COVID-19 outbreak is a particularly unusual one because of the speed at which the market has fallen. Most prior downturns took place over a period of 1-2 years, while this one happened in a span of 3 weeks. The market may still fall further, and if it does, the blue shaded box represents the range of recovery time periods within our historical data set.
Well-diversified portfolios continue to operate as expected despite the turbulence in the market, and we believe they represent the most prudent way to invest in today’s uncertain times.