They say in the investment world, “there are decades when nothing happens and weeks when decades happen.” At the close of trading on the New York Stock Exchange yesterday, March 31st, the S&P 500 Index was down 20% year to date. Will the $2 trillion stimulus bill enacted last week help us find a bottom in equity markets?
We have no idea, but we know one thing: there will be a bottom, and there will be a recovery. Some historical perspective helps in considering the timing of such crashes and recoveries. In the bear market of 2008-2009, the S&P 500 lost 57% from peak to trough, and, in the internet bubble of 2001, the losses reached 49%. Other market crashes can be seen in the following chart from Schwab.
Not included here is the mother of all market crashes, the depression of 1929, during which the S&P 500 fell 86% from peak to trough. Unemployment reached 24% in 1933.
The important point is the timing patterns of corrections and recoveries. Of the last several market crashes, the average duration was 512 days according to Schwab’s chart above, versus the recovery average of 2,310 days. The recoveries last almost five times longer. To be fair, the chart does not show recoveries to previous market highs, but rather prolonged gains until the next 20% crash. Recovery will come from the bottom (whenever we get there), but it will likely be much slower than the declines of the last month and a half. Plan sponsors and plan participants should brace themselves for the long haul back to where we were, and we very possibly have still not seen the bottom.
In our next couple posts, we’ll talk about where current market conditions lead plan sponsors in making decisions about 401k plan investment lineups.