Back To The Future: On Recessions and Bear Markets Past

By Sherrill St. Germain
January 2009, Revised December 2017

You're hearing it everywhere -- in the news, on the Internet, from your financial planner -- "Just sit tight! Now's the worst time to sell. The markets will rebound like they always do. Blah blah blah... " Well, OK, sure, but how long do you have to wait?

That’s certainly the $64,000 question.  Unfortunately, they don’t hand out crystal balls at CFP® school, so your financial planner can't say for sure.  And don't be fooled by confident-sounding pundits in the financial media.

The truth is no one really knows how long it will take for markets to return to previous levels, and history is no guarantee of future results.  But research shows certain patterns have emerged in bear markets past, and we'd be wise to take into account whatever light they may shed on how best to respond at this moment in history.

Key patterns:

  1. Usually, stock market declines begin BEFORE a recession starts, and rebounds begin BEFORE the recession ends.
  2. Recessions last, on average, about 11 months, and markets have experienced, on average, a return of 8% (!) for the recession periods studied.
  3. Bear markets last, on average, a little longer than recessions: 384 days (i.e. just under 13 months.)
  4. On average, the market has gone down 32% from its peak to the low point of the bear market, then up 36% and 12%, respectively, in the first and second years of recovery.

The takeaways:

  1. Buy stock in crystal ball manufacturing firms. (Kidding.)
  2. Regarding your suspicions that this time feels worse than previous stock market declines, it's a little early to say for sure, since we don't know where we are in the cycle. But so far, while this recent decline has not been the steepest ever, we are beating the averages. So, yes, it's been more difficult to stomach than usual.
  3. There are no guarantees. (Surprise!) While most markets ended recessions higher than where they started, there were exceptions -- 2 out of 9 times, in fact.
  4. Still, odds are if you pull all your money out of stocks and sit on the sidelines until markets are "stable," you're likely to miss the rebound - if not all of it, then probably the steepest part. This "steepest part" almost always occurs in the first year or two of the recovery BEFORE anyone is able to clearly identify it as a recovery

So am I saying "Quick, everybody put all your money in the stock market before you miss the rebound!"? Noooooooooooo. 

Rather, unless there's been a significant change in your personal financial circumstances (e.g. job loss), what I am recommending -- at the risk of sounding like a broken record -- is to stick with your plan. This would have you positioned with the right mix of stocks/bonds/cash, both to smooth out any additional rough waters to an appropriate level of volatility for you AND to take advantage of the rebound when it happens.