How the US stockmarket performs after heavy one day falls

The US stockmarket has delivered average annual returns of 14.9% in the five years following its 10 worst days of the past quarter century, according to analysis by Schroders.

The data underlines the historic resilience of shares over longer timeframes, even following shocks.

The past 25 years shows the strongest rebound was a return of 164%, or an annualised 21%, in the five years after a 6.7% fall for the S&P on 20 November 2008.

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

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


The worst days

The pattern is repeated on many other of the ten worst one-day crashes. The most severe was 9.03% fall on 15 October 2008. This was followed by a five-year return of 109%, or an annual equivalent of 15.9%.

In all, seven of the ten worst days over the 25 years fell during a short four-month spell, from September to December 2008.

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 billionaire investor Warren Buffett who invested $5bn in Goldman Sachs in September 2008.

Only three other years feature in the data: 1997, 1998 and 2011. The 6.9% sell-off on 27 October 1997 was caused by an economic crisis in Asia. The 31 August 1998 crash, which saw a similar-sized decline, came shortly after a debt default by Russia which dealt an equal blow to global market confidence. 

After these falls, the returns in the following years were less impressive, despite an initial rally. For example, five years after the 1997 crash, the S&P had only returned 9.6% or a paltry 1.85% a year.

Five years after the 1998 plunge, shares had returned a marginally better total return of 13%. Ten years on from the event, however, the returns were 22% and 28%, or annualised rates of 4.1% and 5.1%.

Five years after the worst sell-off of the eurozone debt crisis, in August 2011, the total return was 117%.

The stock market falls during the post-dotcom 2000 to 2003 slump did not make the top ten. A 5.8% fall on 14 April 2000 was the 11th worst. It was followed by a 7.4% loss five years later. A 4.9% fall on 17 September 2001 was followed by a five-year return of 39%. 

The calculations were based on 25 years of “total return” Bloomberg data, which includes the contribution of dividend income payments to returns.

Data for the turbulence of 1987 is not available on a daily basis and therefore the infamous Black Monday sell-off could not be covered in the analysis. However, the monthly data is available and reflects a strong rebound. The S&P fell by 20.5% on 19 October 1987. The five years that followed delivered annual returns of 14.4% or 96% in total.

Similar data was collated by Schroders for the UK’s FTSE All-Share in June. The strongest recovery from the ten worst days was a 126% five-year gain following the worst of the banking crisis turbulence in Britain on 2 March 2009.

The average five-year recovery for the FTSE following the ten biggest one-day falls over 25 years was 79.8% or an annualised 12.5%, marginally below the 14.9% for America’s S&P 500.

The views and opinions contained herein are those of Schroders and these views are intended only for illustrative purposes. Performance stated reflects past performance, which is no guarantee of future results. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. Performance is based on unmanaged indexes, and an investor cannot invest directly in any index. Not intended to serve as an individual investment recommendation or research. Please discuss any investment considerations with your financial advisor.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.