Snapshot

Managers' views

How stock markets perform after heavy falls


David Brett

David Brett

Investment Writer

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Coronavirus concerns have swept through financial markets. Globally, stocks have endured some of their worst performances since the days of the financial crisis.

It is impossible to predict what may happen next. The severity of the disease and its long-term economic impacts are still yet to be seen. However, while the stock market has been quick to react, 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 was during 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

In fact, the pattern is repeated on many other worst one-day crashes.

Falls associated with the global financial crisis, including the eurozone debt crisis, account for seven of the ten 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.

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.

A $1,000 investment in the S&P 500 at the end of 1988, left alone, could now be worth $22,678, not adjusted for charges or inflation. That’s an average annual return of 10.6%.

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