The Sun Will Come Out: What a Market Recovery Will Look Like

The Sun Will Come Out: What a Market Recovery Will Look Like

May 11, 2022
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(Chart by First Trust L.P.)

I made my first stock investment in 1980 as a high school freshman.  The DOW was under 1,000 and little did I know what epic challenges the world would face in the decades to come.  If I had a crystal ball at that time and could read some of the extreme headlines that would make the news, I am sure I would have not invested a penny. But here we are today, with the DOW around 32,000.  What a mistake it would have been to let bad political, social, and even economic news keep me from participating in one of the greatest wealth creation machines in history, the U.S. economy and stock market in particular.

 

Yet during that time there were 9 bear markets (as defined as a decline of 20%+ for the S&P 500), or about 1 every 4 to 5 years.  The reality, however, is that no one knows when they will arrive, how long they will last, or how low the indices will go before the inevitable rebound occurs.

 

What is interesting to note that in nearly half the years in which a bear market occurred, the market actually finished up on the year.  For example, in 1987, the market finished the year up 2% after being down 34% intra year.  In 2009, the market closed up 23% after being down 28% at its lows. That means the market rallied 71% off its intra-year lows.  In 2020, the market rose over 75% from its lows to finish the year up 16%.  Even for years when the market did not fully recover, several ended up with returns of low single digit losses, hardly anything to write home about (see attached chart).

 

Imagine selling into the bear market lows of 2009 or 2020 or for that matter any other bear market decline in history, for funds you did/do not need for years (and indeed if you need money in the next couple years, rule # 1 of investing is that it should be kept in something short-term like a money market fund or short-term bonds, not stocks).  What feels ‘good’ in the moment (to act and sell when stocks are down) can soon turn into a lifelong regret.

 

I have written extensively on how quickly markets can rebound, about how if you miss just a few of the best days each year your returns plummet, and how you cannot time the market – no one can.

 

Thus, in times of challenge – be them health, economic, political (war), etc. – you always need to go back to the basics.  In this case, make sure (hopefully you work with a disciplined Financial Advisor who has already set this in place for you) you have either existing funds, ongoing cash flow, or both to cover your needs for the next 12 – 24 months.  That way you will not be a forced seller into market weakness.  Do not think you can time getting in and out of the market – you cannot, and thankfully you don’t need to in order to achieve your near and long-term financial goals.

 

With these investment principles firmly in place, you can go back to living your life and the inevitable stock market recovery will occur.  What will it look like this time around?  Just as the market tends to anticipate adversity many months in advance, it does so on the upside as well.  Long before better inflation readings have taken place or the supply chain challenges have been resolved, stock market indices will begin to recover and then the negative headlines of 2022 (lingering pandemic especially in China, supply chain constraints, inflation, war in Ukraine) will begin to fade and stocks will resume their ongoing march upwards.

 

In the last 40+ years since I purchased my first stock, there have been myriad headlines and events that surely would have suggested the death of stocks.  But each time that is proclaimed (think of the famous Business Week headline in 1979 screaming: “THE DEATH OF EQUITIES: HOW INFLATION IS DESTROYING THE STOCK MARKET” – how ironic that it is Business Week which essentially died, not the stock market), whatever issue caused the panic subsides, and stock prices head back up again.

 

This time will be no different – the headlines will change, the war will end, the pandemic will subside (or at least materially lessen), the supply chain will improve, inflation will moderate, the Fed will stop raising interest rates, and the sun will come out again.  The only question is what decisions you will make with your hard-earned investments between now and then.  Think very carefully – and for the long term – before you act.