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The S&P 500 lost 8.57% last month, which was the worst January on record. Even worse, a January loss for the index has typically meant a full-year loss for the market about 75% of the time.
The big question right now is whether we will see another fall to the lows made back in November. And the bigger question is whether we will go even lower than that.
If the answer is “yes,” it will be a rare event indeed. In fact …
Only Twice Before Have Stocks Ever Rallied
More Than 20%, Then Broken Bear Lows
Technically, stocks began a new bull market on December 8, 2008.
Yes, you read that right. The market’s December 8 close represented a 21% gain from the low hit on November 20. And the technical definition of a bull market is a 20% rise in prices.
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Okay, I would hardly call this a new bull market. But we cannot yet call it a bear market rally, either …
Since World War II, the S&P 500 has only ever posted a 20%+ rally from a bear market low one other time. It happened earlier this decade. (The other time we saw a 20%+ bear market rally was back around the time of the Great Depression.)
In every other historical case, the market’s initial low held when stocks subsequently gained at least 20%.
To anyone sitting on big losses, that’s of little consolation right now. Moreover, these are certainly extreme times, precisely the times that prove exceptions to rules.
The fact that the S&P 500 wasn’t able to break into the 1,000 range during its early January surge was discouraging, and suggests a retest of the lows could be in the cards.
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| This has been the worst bear market since the 1930s … |
So, How Bad Have the Worst Bears Been?
As you’d expect, the worst two bear markets in the S&P 500 both occurred in the 1930s:
The first, from 1929-1932, was horribly severe — sending stocks down 86%.
The second happened between 1937 and 1938, producing a 54% loss for stocks from peak to trough.
Let’s compare those two precedents to this cycle …
The S&P 500’s November low was 752, which amounted to a peak-to-trough loss of 52%.
That makes the current downturn the third worst in modern stock market history, but not as bad as either of the Great Depression bears.
On the other hand, this decline took just 13 months. Typically, a market loss of 40%+ takes 21 months. So the speed of the decline was atypically fast.
Another interesting fact: The drop to 752 took us a couple percentage points past the starting point of the last bull market. In other words, it erased every single penny of the 2002-2007 bull market’s advance!
According to S&P, the average bear market only retraces 73% of the previous bull market.
Conclusion: Based on history, things could get much worse. However, the current downturn has already been deeper and faster than nearly every other bear market in the books.
Now, a little good news …
When the Carnage Is Over, Investors Can
Expect Swift and Substantial Gains
The average first year of a bull market has produced a gain of 46% for the S&P 500. So if we base that on the 752 low, we arrive at 1,052 on the “500.”
Looking farther out, the average bull market produces an overall gain of 164% over an average of 57 months. Applying that typical gain to the low of 752 would put the index back at 1,233.
And again, I’ll reiterate that since these are anything but average times, everything will likely be well above the norms.
I’m not going to pull punches: Anyone who invested everything at the top of the market could be waiting a long time for a full recovery of their capital.
But for anyone who’s steadily building a diversified portfolio of quality companies, and especially for anyone pursuing dollar-cost averaging strategies (including dividend reinvestment) throughout this downturn, the odds of a solid return are still very likely.
Best wishes,
Nilus
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