With the equity market having hit its last new high on February 19th of this year, the depth and speed of the market drop has been ferocious. The market fell -33.9% in just 24 days, over 10 times faster than the 2008 correction. Investors are getting increasingly used to market volatility reflecting the massive amount of uncertainty in light of COVID-19. The economy and corporate earnings recovery are especially relevant in order for markets to return to new highs. Research shows that the market tends to bottom well in advance of the economic data. On average, the stock market bottoms around 1.5 months before the peak in jobless claims and 4.5 months before the end of the recession.
However, we are not getting ahead of ourselves. There is still much to understand about the nature of the current recession and subsequent recovery: will fiscal stimulus be enough to keep businesses solvent and Americans out of poverty, despite rapid increases in unemployment? Will monetary stimulus provide enough liquidity in the financial plumbing to keep markets running smoothly? While we do not have answers to these questions yet, we can expect elevated uncertainty over the foreseeable future, at the very least, until a vaccine is created and widely distributed.
All that said, investors are still trying to determine if markets might retest the recent lows. Market timing is always excruciatingly difficult, and trying to gauge when markets will bottom in this environment is no exception. Given this, and as highlighted below, even if it takes 5 years to recover to the market peak, the average annual return over that period would be 7%. If the market recovers faster, say in 3 years, that implies a 10% average annual return. These are still very impressive returns, especially when compared to expectations for fixed income returns in this 0% interest rate environment.
Since 1928, the U.S. has experienced 14 recessions and 21 bear markets, yet the market has never failed to recover and pass its previous peak and this time will be no different. We are in unprecedented times and with volatility expected to be elevated over the short term, investors should be positioned with a high-quality bias throughout portfolios. Looking ahead, regardless of how long it takes, returns during the rebound are likely to be strong.
Average returns needed to recover to market peak