When Will It Turn?

My son sent me this hopeful chart today. It shows how the stock market has fared following a 25% decline in the S&P 500 over the last 70 years.

Of course, as they say, past performance is no predictor of future performance. Still, it is nice to see that big market drops have historically turned back to growth rather quickly.

I had hoped that our bear market had ended back in May. Since then, it went up and then way down. It’s now down 4% from what I hoped was the bottom (S&P: 3,744 vs 3,901).

The next question will be how long the market takes to completely recover its losses? The chart doesn’t show that well. The 1973-74 bear market, for example, took a full 10 years to get back to the same value.

How long do you think it will take for the market to reach their previous high again (4,793 on 1/6/22)?

Chart: http://www.irrelevantinvestor.com

6 thoughts on “When Will It Turn?

  1. It is the first Friday of the month when I review financial reports on the previous month.

    Here are some numbers from Brian Bollinger (I like his work a lot).

    “Since 1950, the S&P 500 has now experienced 12 bear markets (see below). On average, they have taken three years to reclaim a new high, with an average drawdown of 34% at the bottom.”

    “The 2022 bear market (red dot below) is not quite one year old, and the S&P 500 sits 22% below its record high. If the market followed a 1973-style stagflation scenario, the S&P 500 would have another 33% to fall and require nearly seven more years before topping its January 2022 high.”

    Here is how the spreadsheet hides what is going on. For example purposes, suppose you have a 50% drawdown in one year. You don’t need to make 50% back to reach your high water mark, you need to earn back 100% or double your money to get back to where you were. This is why Warren Buffett says, “the number rule of investing is don’t lose money”.

    For a young man (like your son) who should be aggressively putting new cash to work investing right now, he will likely be having interesting returns over the next couple years (as soon as the drawdown is over). People who are retired and not investing new cash and are trying to live on capital gains and interest, they are going to take a while to get back to where they were. Taking years to get back to where you were in a time of high inflation will not make you thrive.

    Buying stocks in dividend stocks that are increasing with a high likelihood to continue growing is a great approach for people at any time in their investment lifecycle. Learn to pay more attention to the bottom of your brokerage statement, which is the annual income. The Market Value listed at the top of the statement is a crazy emotional guy called “Mr. Market” telling you what he is willing to pay today for your income stream. Would you sell a money making rental property because someone showed up at your door and offered you a low ball price?

    You will see that the income stream if you are buying the right kind of stocks does not go up and down very much, and drifts higher over time to keep you ahead of inflation. There was a time when people like my Grandfather bought stocks and received the certificates that they locked away some where safe. It was very hard to get a quote on the market price. Buying and selling were very expensive. They loved getting their dividend checks in the mail and especially loved it when they got a bigger check from a company than they got the previous year. They went to annual meetings at local companies because they wanted to learn about how the company they owned part of was doing.

    As a parting comment, I would like to mention that bad government policy exacerbated the economic situation in the 1970s, 2000, and 2007 to 2009 timeframes. Nixon had the oil embargoes that were driving up the price of oil and he tried putting price control in place which led to gas lines around the block, and took us fully off the gold standard. Note I used the word “fully”, because Roosevelt started the process. Carter afterwards didn’t help.

    2000 to 2002 started with an end of the Internet Investment Bubble, then we had 9/11 which resulted in George Bush the Lesser getting the USA in its two longest running wars and letting the deficit spending genie back out of the bottle.

    The 2007 to 2009 housing debacle could have been stopped in 2005 if Congress had listened to Fannie Mae’s auditor who had reported that it was insolvent due to bad underwriting and liar loans.

    I think the deciding factor for when this downturn ends is what happens with the midterms in November? A change in Congress with a Contract with America style mandate will slow down the money printing presses or will the bad governance continue?

    Liked by 1 person

    1. I think you know that the answer to your question is that the bad governance will certainly continue, making the duration of this Bear economy hard to predict. At best, we are going to get a gridlocked Washington DC. Even if the red team wins both houses, they aren’t going to have veto-proof majorities. So Biden will simply veto the ‘Contract with America’. It’s unfortunate, but bad governance is highly predictable.

      Liked by 1 person

      1. And of course he will blame the Republicans for shutting down government, and find the most punitive ways possible to shut down government. A couple years ago, during one of these, they actually spent money to put up signs to shut down hiking trails in a nearby National Park.

        Liked by 1 person

      2. He will try, but I would say that the Democrats risk more in a shut down. Biden is the face of the government to most Americans. He will be blamed (vs the faceless Republicans) by the causal observer. And, the next GOP Presidential Candidate (Trump, DeSantis?) will be able to use it against him, having had nothing to do with it themselves.

        Liked by 1 person

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