Past rallies have shown staying power
While downturns are difficult, a look at the 5-year periods following market declines reveals some meaningful recoveries and opportunities for investors.
It’s been five years since the stock market lost much of its value in 2008, and many investors who fled the market have returned during the subsequent recovery. After hitting a low on March 9, 2009, the S&P 500, an unmanaged index with no expenses, soared 72% 12-months later. And that was followed by three years marked by positive returns. Although we can’t predict the future, a look at what’s happened in the past offers a worthwhile perspective.
This table reveals how the market has rebounded after bottoming out. Since 1929, the S&P 500 had at least one major decline of about 15% or more (excluding dividends and/or distributions) every decade. The losses varied widely in intensity, length and frequency, but in most cases they were followed by years of gains interrupted by only the occasional down year.
Significant market declines and subsequent five-year periods
* The return for each of the five years after a low is a 12-month return based on the date of the low. For example, the first year is the 12-month period from 3/9/09 to 3/9/10.
† Market downturns are based on a decline of about 10% or more in the S&P 500’s value (excluding dividends and/or distributions) with 50% recovery after each decline.
The percent decline is based on the index value of the unmanaged S&P 500 excluding dividends and/or distributions. Each market decline reflects a period of more than 80 days and a decline of about 15% or more in the S&P 500’s index value with 100% recovery after each decline (except for a 78% recovery between 3/6/78 and 11/28/80 and a 77% recovery between 3/9/09 and 4/29/11). The average annual total returns and hypothetical investment results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or taxes. Standard & Poor’s 500 Composite Index is a market capitalization-weighted index based on the average weighted results of 500 widely held common stocks.
As the table indicates, the S&P 500 has produced an average gain of 54.78% in the first year following a major drop, 16.25% in the second, 10.02% in the third, 15.18% in the fourth and 11.70% in the fifth. Some rallies have lasted even longer. (These figures are past results and are not predictive of results in future periods.)
Although there is no guarantee this will be repeated, a look at 5-year periods following declines reveals some trends:
- The average annual total return for the five-year periods after each decline was positive 100% of the time.
- A hypothetical $10,000 investment in the S&P 500 would have at least doubled 12 out of 16 times.
Downturns are difficult, and investors’ decisions can be influenced by anxiety. However, a regular investing program can reduce the temptation to abandon the market based on large gains or losses and then try to guess the best time to re-enter. With a systematic investment plan, mutual fund shareholders invest the same amount at regular intervals – $500 a month for example – regardless of whether stock prices are rising or falling. While this strategy, known as dollar cost averaging, does not ensure a profit or protect against loss, it does make it possible for investors to purchase a greater number of shares when prices are low and a smaller number when they are high. It also limits the tendency to lock in losses during downswings and helps ensure participation in any eventual recovery.