How stock markets perform after heavy falls

While public attention has understandably focused on the grave humanitarian consequences of the invasion of Ukraine, global markets have reflected investors’ concerns about financial and economic impacts.

To date the current crisis has seen major markets fall by approximately 10%. This fall has been spread over a period of weeks.

Individual days have recorded falls which are – by historic measures – comparatively small.

The outbreak of the pandemic in 2020, for instance, resulted in sharper falls. The US stock market, as measured by the S&P 500, fell 7.6% in one day on 9 March 2020, for example – its fifth worst trading day since 1988. On the same day UK stocks also fell sharply. The FTSE All-Share Index dropped 7.4%.

While the stock market has been quick to react to shocks of all types, history shows it has a tendency to bounce back strongly over time.

How the stock market bounces back

Using the US stock market as an example, the past three decades show the strongest five-year rebound in the US brought a return of 164%. That is an annualised return of 21% in the five years after a 6.7% fall for the S&P on 20 November 2008.

That date marked a particularly gloomy phase of the 2008-09 financial crisis.

Given the abject mood at the time, investors may have struggled to believe that an investment of $10,000 made in the market at the start of that turbulent day would have grown to $26,400 within five years, before charges.

Of course, past performance is not guaranteed to be repeated in the future. The returns are illustrative and do not include any costs or fees. But the data underlines the historic resilience of shares over longer timeframes, even following shocks.

A short history of the stock market’s worst days

As the table above shows, the pattern is repeated on many other of the 10 worst one-day crashes.

Falls associated with the global financial crisis, including the eurozone debt crisis in 2011, account for seven of the 10 worst days the US stock market has endured since 1989.

The most severe was a 9.0% fall on 15 October 2008. This was followed by a five-year return of 109%, or an annual equivalent of 15.9%.

The credit crisis escalated into a full-blown financial crisis in 2008 with the collapse of the investment bank Bear Stearns, and worsened with the failure of Lehman Brothers in September of that year. This created a domino-effect among banks and insurers. Forced mergers and government bailouts were required to stabilise markets.

Such crisis moments attract contrarian investors, such as the feted investor Warren Buffett who invested $5 billion in Goldman Sachs in September 2008.

And the worst of the rest

The stock market falls during the post-dotcom 2000 to 2003 slump did not make the top 10. A 5.8% fall on 14 April 2000 was the 12th worst. It was followed by a 7.4% loss five years later.

The data doesn't stretch back to Black Monday in October 1987 when US stocks fell 22% in a day, their biggest ever one-day fall.

Time in the market

As the chart below shows, the stock market has provided healthy returns, despite the ups and downs over the last three decades and providing you can keep your nerve.

The chart illustrates the change in “real” (after inflation) value each year of £1,000 invested in UK stocks (represented by the FTSE All-Share), a UK bank account or simply as cash “under the bed”.