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Bear Markets and their historic financial and economic recoveries


March 17, 2020

The market selloff on March 16th has resulted in a 29.5% fall from the market peak reached February 19th, using the S&P 500 as the benchmark. Declines which exceed 20% are often deemed “bear markets,” and raise investor concerns with respect to the magnitude and timing of their potential recovery. In this note, The Mather Group would like to share some historic data which illustrates the financial and economic recoveries from both prior bear markets and pandemics.

Let's begin by reviewing historic market recoveries. There have been 25 bear markets since the 1929 Crash, with an average market decline of 35.7%, lasting on average 299 days. More specifically, let's examine the market's response to the 5 largest declines during this 91-year period, as shown in the table below. It reveals the one-year market returns for each of the 5 successive years following each of these bear markets.

Recoveries have been strong

Of these 25 one-year periods, only 2 years showed a subsequent negative market return. More positively, the first-year returns following these market downturns ranged from 36.2% to 137.6%, resulting in an average return of 70.9%. The subsequent one year returns averaged 12.7% in the second year, 9.9% in the third year, 26.3% in the fourth year and 10.2% in the fifth and final year.

Overall, the average annual return was 23.1% for the five-year period beginning at the end of these five largest market declines. As such, a $10,000 investment made at the end of these bear markets would have, on average, reached a level of $29,298 at the end of the fifth year. Market timing, or moving out of the markets during such periods of market downturn if only for a few months, could have reduced an investor's opportunity to participate in such subsequent, positive market returns.

Of course, governments, corporations and investors are increasingly concerned about the potential emergence of a significant recession resulting from the Covid-19 pandemic. With population mobility severely limited, the closure of many service and manufacturing businesses underway and a decline in consumer and CEO optimism, investment and spending will fall in the short-term.

If there is a recession, a first question to ask is what the “shape” and duration of it will be. By shape, economists separate recessions and their subsequent recoveries into one of three types: V-shaped; U-shaped or L-shaped. As shown in the graphic below, a Vshaped recession sees economies recovering quickly to reach even higher levels of GDP growth. This has been the shape of most, but not all, past recessions. A U-shaped recession takes longer to recover, but then only achieves its prior level of GDP growth without any increase. A L-shaped recession, as occurred during the Great Depression, extends even longer than the other two and does not return to its prior level of GDP growth.

Prior Epidemics Were V Shaped

A second question to ask is what can economic history tell us about the potential shape of a future recession caused by the Covid-19 epidemic? Prior to this current pandemic, there have been four pandemics during the last 100 years, beginning with the Spanish Flu which occurred toward the end of World War I. As shown in the graphic below, each of these pandemics has been associated with a V-shaped recession. More specifically, the Spanish Flu resulted in negative GDP growth in 1917, only to be followed by 9% annual GDP growth in 1918.

Recoveris Data

Further, the Asian Flu of 1958 resulted in a negative GDP growth rate of 10% in 1958, but quickly reached a positive growth rate of 10% just a year later. The 1968 Hong Kong Flu saw GDP growth fall close to 0% in 1968, but it returned to a 5% growth rate less than a year later. On a more country-specific basis, the 2002 SARS pandemic caused Hong Kong's GDP growth rate to fall to a negative 10% during that year, only to return to a 20% growth rate a year later.

A primary reason each of these pandemics resulted in such significant GDP growth afterward is that the recessions they caused were not due to underlying structural issues in the global economy. Rather, they were due to the sudden economic shock resulting from massive efforts to control each pandemic. Once this transient health issue had diminished, the global economy returned to its growth pathway, supported by the resumption of corporate and individual optimism and spending.

The Mather Group hopes these historical examples provide some measure of helpful information in this period of market uncertainty, but it is in no way a guarantee that markets will perform as they have historically. The market may not have reached its eventual bottom, of course, but the significant response by governments, central banks and the citizenry is a testament that the powers that be are doing everything possible to prevail in the future. If you have further questions or concerns, The Mather Group's professionals are ready to support you with potential solutions.


The opinions expressed, and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. The opinions and advice expressed in this communication are based on The Mather Group's research and professional experience and are expressed as of the publishing date of this communication. The Mather Group makes no warranty or representation, express or implied, nor does The Mather Group accept any liability, with respect to the information and data set forth herein. The Mather Group specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication does not constitute legal, tax, accounting, investment, or other professional advice nor is it intended to provide comprehensive tax advice or financial planning with respect to every aspect of a client's financial situation. Past performance is not indicative of future results.

Sources: S&P Global, Capital Group, Boston Consulting Group, Harvard Business Review, Ned Davis Research



The Mather Group



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