Managing your capital

How long does a market slump last?

After 11 years of growth - admittedly, with interim peaks and troughs - market sentiment changed in March. Anxiety about the corona pandemic, combined with sinking oil prices, had the alarm bells going off for a number of share investors.

In just a few weeks, various indices fell rapidly, by at least 20% of the year’s peak, resulting in a bear market. 

Will things get back on an even keel? This is a question that a lot of investors ask themselves in crisis situations like the one we are currently experiencing. Economic crises have occurred throughout history. Regardless of how serious and surreal they feel as an immediate experience: the economy has always successfully righted itself, no matter what the cause of the crisis was.

The same is true for stock markets. Whether you are analysing the Great Depression of the 1930s or the 2008 financial crisis: after a decreasing trend, the market responded and continued to grow. Over the past 100 years, the S&P 500 (and its predecessors) experienced 14 bear markets (including the corona crisis). Moreover, on five of those occasions, the plunge exceeded 40%:

  • 1929-1932: Wall Street crashed after years of extreme surges and speculation (-85%)
  • 1937-1942: the Second World War (-59%)
  • 1973-1974: the Yom Kippur War, the oil crisis and Watergate (-48%)
  • 000-2002: the bursting of the dotcom bubble (-49%)
  • 2007-2009: the collapse of the American housing market and the financial crisis (-57%).

During the 13 bear markets that occurred between 1929-2009, it took, on average, 96 months for the S&P 500 to recover to its initial level (adjusted for inflation). But despite all the periods with drops of at least 20%, the trend remained positive over the longer term. While the S&P 500 started in 1920 with 8.83 points, the index clocked in at 3,278.2 at the start of 2020. That amounts to 371 times higher.*

"Will things get back on an even keel? This is a question that a lot of investors ask themselves in crisis situations"

Takeaways for investors

  1. While the markets do always recover, there is no guide as to when exactly a revival will take place. However, crises and their outcomes cannot be compared with one another: the differences in context, underlying dynamics and zeitgeist are too large for that. The current pandemic, which has seen activities across many sectors suspended, as well as its specific context (including a low interest rate environment), make this crisis exceptional. Looked at historically, recovery always comes, but when precisely this will occur, no one knows. Staying focussed on the long term is the first rule of thumb in volatile times. 
  2. Continually stepping into and out of the market increases the risk that you will miss the best days. For the Dow Jones Industrial Average (DJIA), the corona crisis was responsible for both its worst day in history, in terms of points lost, and its best day. Between 13 December 1984 and 25 March 2020, the index rose by 1,650%. If, in that period you had invested in a product that mirrored the evolution of the DJIA, you would have seen a gross return of 1,650%. However, if you were on the sidelines during the 20 best days, then your gross return would have amounted to only 375%.**
  3. Remaining invested does not mean that you never have to check on your investments. Investment topics come and go, your appetite for risk can change over the years, your capital can appear differently as time goes on, etc. That is why you should regularly do an investor profile check-up and review your objectives and portfolio in consultation with an adviser.

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