What comes after a bear market? You will like the answer
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Monday saw the S&P 500 have its third worst daily return since 1928, falling 12%. In fact, two of the past three trading sessions for U.S. stocks have given us two of the six worst daily returns ever.
This is not the greatest company to be in considering this list is littered with losses seen during the Great Depression, Great Recession and 1937 recession which was something of an echo-recession following the 1929-1932 debacle.
As coronavirus panic spread, U.S. stocks just experienced the fastest bear market in history, falling 20% in just 16 trading sessions and finishing the day on Monday down close 30%, which happened just two trading sessions later.
By my calculations, there have been just eleven bear markets with losses of 30% or worse over the past 90-plus years:
So the current iteration would be among the worst dozen or so market crashes in U.S. stocks.
Stocks could always go down further. No one knows how bad things will get economically considering the quarantine and stoppage of businesses are basically experiments being run in real-time. Things are going to get worse before they get better.
It may not feel like it now, but eventually we will recover. Financial markets will come back and the economy will mend itself. There will be much pain and suffering between now and then but we are a strong species and we will endure.
Not many investors are thinking this way but returns following a bear market are pretty good if you can hang on. Here are the one, three and five year returns following each of the past bear markets:
Average returns following bear markets have been 52%, 89% and 132% respectively over the ensuing one, three, and five year periods. Of course, these returns come from the depths of the bear markets.
No one knows when stocks will bottom because markets in freefall are mainly driven by a combination of emotion and herd psychology. It’s certainly possible there is another leg down from current levels.
Six out of the eleven bear markets of 30% or worse went down more than 40%. Stocks would have to fall another 15% or so from here to be down 40% in total.
Three of the eleven bear markets of 30% or worse went down more than 50%. Stocks would have to fall another 30% or so from here to be down 50% in total.
In mid-October of 2008, Warren Buffett penned an op-ed for the New York Times entitled, “Buy American. I am.” At that point the S&P 500 was nearly 40% off its highs and in the midst of the worst financial crisis since the Great Depression.
The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary. So … I’ve been buying American stocks.
Stocks would fall a further 30% or so from the day Buffett said he was buying stocks. Even the world’s greatest investor cannot nail the bottom in a falling market.
But had you purchased a simple S&P 500 index fund on the very same day Buffett said he was buying, you would be up more than 220% right now (and that includes the recent sell-off).
The truth is no one knows how to spot a bottom in real-time. Stocks are down a lot and this has been a painful recalibration for investors. The good news for those who are still saving on a regular basis is that stocks tend to have higher expected returns following a market crash.
If you have a long time horizon, even buying before stocks bottom can lead to positive outcomes.
Ben Carlson, CFA is the Director of Institutional Asset Management at Ritholtz Wealth Management. He may own securities or assets discussed in this piece.
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