Good News About Market Declines
The skies above Wall Street have been pretty cloudy of late, but stormy weather is nothing new to the stock market. In fact, since 1929 investors have seen 13 bear markets in which stocks fell 20 percent or more.
But here’s the good news: In each case, the market bounced back and climbed even higher. And while past performance is no guarantee of how things will turn out tomorrow or next year, it does give us reason to be optimistic.
History is on your side
The Great Depression earned its title. From September 1929 through June 1932, the market lost over 85 percent of its value. Yet investments in the broad market made in 1930, well before the bottom of the bear market, returned an annual average of 4 percent above inflation over the next 10 years. [1]
Experience suggests this wasn't a fluke. For example, in September 2001 the S&P 500 was down 26 percent over the previous 12 months. But fast-forward five years, and you’ll find it returned an annual average of 7 percent a year over those five years.
As the chart below shows, the worst 12-month stock market declines historically have been followed by periods of even greater recovery.
| 12 Months Ended | Trailing 12-Month Return | Next 1-Year Return | Next 5-Year Return | Next 10-Year Return |
|---|---|---|---|---|
Sept. 1974 |
-38.9% | +38.1% | +16.8% | +15.6% |
| Sept. 2001 | -26.6% | -20.5% | +7.0% | — |
| March 2003 | -24.8% | +35.1% | +11.32% | |
| May 1970 | -23.3% | +34.7% | +7.3% | +8.2% |
| Aug. 1988 | -17.8% | +39.0% | +15.8% | +17.0% |
| Oct. 1962 | -14.9% | +35.3% | +14.3% | +10.6% |
| July 1982 | -13.4% | +59.4% | +29.7% | +19.2% |
| Sept. 1966 | -12.0% | +30.6% | +8.7% | + 6.9% |
| Dec. 1957 | -10.8% | +43.4% | +13.3% | +12.8% |
| Sept. 1990 | -9.3% | +31.3% | +17.2% | +19.4% |
- The trailing 12-month returns were sorted from worst to best. Adjacent 12-month periods were not considered. As a result, the 12 months ended September 1974 had the lowest return in the data set, so the 12-month periods that overlapped with September 1974 were not considered.
- The trailing 12-month returns are compounded total monthly returns for the S&P 500 as reported by Ibbotson Associates. The 5- and 10-year returns are annualized total returns. Investors cannot invest directly in an index.
- This chart demonstrates historical results. There is no guarantee of future positive returns after a prolonged stock market downturn.
Will history repeat itself this time around? No one can say for sure, but historically, odds appear to be in your favor.
Are you ready to benefit?
Not everyone profits from investments made during a down market. Those who concentrate in a single stock or a specific industry are at much higher risk than investors who have a broad-based portfolio of equities and other investments. Likewise, if you’re near retirement, you may not have the time (or the stomach) to ride out the rough patches.
The best approach is to educate yourself about the various types of investments available to you to help reduce risk to a level you’re comfortable with. That way, you’ll spend less time worrying about the present and more time focused on the future.
- [1]
- Green, Alexander. "Lessons of the Great Depression: Generous Returns from Stocks." Seeking Alpha website, http://seekingalpha.com/article/123762-lessons-of-the-great-depression-generous-returns-from-stock
