Broker Check

A Look at Market Recoveries

March 25, 2020
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Was it just me or did last week feel like it lasted a month?  And has the last month felt like a year?  It's funny how that works.  When things are going well, the time flies.  When you're going through a rough stretch, time seems to stand still.  Anyway, let's take a look at where things stand and what the numbers mean moving forward!

As of the moment I'm writing this, we've seen the S&P 500 fall by about 30% from the February highs, making this one of the swiftest 30% declines in history.  As I've said in the past, the stock market hates uncertainty, and this virus has led us into some uncharted territory with regards to the economic shut downs and self isolation rules.  So what we are seeing from the stock market is an unprecedented response to an unprecedented situation.  

I think it's safe to assume that we will see the economy contract over the next several months.  You could call it a self-imposed recession.  I know that R word is a scary one and has bad connotations but the good news is that we know it's coming because we are voluntarily causing it.  Most economists believe this will be a very short-lived contraction followed by a strong bounce back later in the year.  In the meantime, the government is throwing everything they can at the situation to help calm the markets and help see businesses and workers through to the other side.  

Looking Ahead...

Stock markets are usually leading indicators, meaning they fall before the data gets bad, and they rise before the data turns positive.  They are forward looking.  For example, during the Great Financial Crisis of 2007-09, the stock market reversed course and began rising in March of 2009, yet unemployment continued to grow through October of that year.  This could mean that we'll see the stock market reverse it's current course and start trending back higher well before the underlying economy begins to recover, which we expect to happen later this year.  Might the market go lower from here before that happens?  Certainly it could. Or maybe it won't.  It's impossible to know where the market will go in the short term but we hope the bulk of the selloff is behind us.  Either way, let's look out a little longer and get an idea of what we may expect from our investments in the years to come.  

Recovery Math...

History shows us the stock market is likely to eventually return to it's previous levels and make new highs. Every crisis before that has battered the market and felt like the end of the world as we know it has eventually given way to a new bull market and new highs for stocks.  Every time.  So if we assume that will also be the outcome of this crisis, we can get an idea for what our returns could be in the future.  I think you're going to like this part :)

  • If the market falls 10%, it takes an 11% return to get back to even.
  • If the market falls 20%, it takes a 25% return to get back to even,
  • If the market falls 33% (current drop), it takes a 50% return to get back to even.  

So based on where we are today, if we assume that at some point in the future the stock market will fully recover, the S&P 500 stock index will have grown by AT LEAST 50% from current levels.  What we don't know for sure is how long that could take.  It could take months or it could take years....There's no way to know for sure, so let's look at what our average annualized return from the current levels back to previous highs would be based on some different recovery timeframes.

  1. If the market were to recover to previously established highs over the next 1 year, that would represent a 50% annual increase from current levels.
  2. If the market were to recover to previously established highs over the next 2 years, that would represent a 22% average annual increase from current levels.
  3. If the market were to recover to previously established highs over the next 3 years, that would represent a 14% average annual increase from current levels.
  4. Even if it were to take 5 years to recover to previous highs, this would still represent an 8% average annual increase from current levels.

My point is - As stock prices drop, forward potential returns actually rise.  THIS is why I always encourage you to stay invested or, depending on your situation, invest more as the market goes down.  In the moment it feels nerve racking and painful, but the lower we go, the greater the forward returns could be on dollars that stay invested and on new dollars that get invested.  If we remove dollars from the markets while they're down, we risk missing out on the ensuing recovery.  If we believe the market will return to levels we saw before the crisis, we should continue to invest during the crisis.

So, with this information, what have I been doing personally?  I've been practicing what I preach.  I've stayed committed to my long-term investment strategy because I believe the stock market will recover, and based on history, so should you.  And if we believe the market will eventually recover, the dollars we kept invested and new dollars we got invested will have produced substantial returns from this point forward.  

What's done is done.  If we now focus ahead on this new opportunity for greater forward returns it'll help us stay optimistic and committed to our long-term strategy. 

Stay patient.  Stay the course.  We will get through this.  I'm with you every step of the way.  Always feel free to reach out to me with questions/concerns or if you just need to chat because you're feeling anxious.  

-NZ

 

Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.