Market volatility

Guide to stock market recoveries

September 30, 2024

If market declines make you nervous, you’re not alone. But while bear markets can be extraordinarily difficult, they also can be moments of opportunity. Investors who find the courage and conviction to stick to their long-term plans have often been rewarded as markets bounce back.

We hope this article can help you regain confidence by providing:

 

3 facts about market recoveries

 

Fact #1: Recoveries have been much longer and stronger than downturns

 

The good news is bear markets have been relatively short compared to recoveries. They can feel like they last forever when we’re in them, but in reality they have been much less impactful compared to the long-term power of bull markets.

 

Although every market decline is unique, the average bear market since 1950 has lasted 12 months. The average bull market has been more than five times longer.

 

The difference in returns has been just as dramatic. Even though the average bull market has averaged a 265% gain, recoveries are rarely a smooth ride. Investors often face scary headlines, significant market volatility and additional equity declines along the way. But investors able to move past the noise and stick to their plans have been better positioned when the recovery eventually occurs.

Every bull market has been longer than the bear market that preceded it

The chart shows the cumulative price return of all U.S. bull and bear markets since 1949. It also includes the average total return and duration of the average bull and bear market during that period. There are 12 bull markets and 11 bear markets displayed on the chart. Completed bull markets had returns ranging from 48% to 582%. Completed bear markets had returns ranging from –21% to –57%. The average bull market had a 265% total return and a duration of 67 months. The average bear market had a –33% total return and a duration of 12 months.

Sources: Capital Group, RIMES, Standard & Poor’s. Includes daily returns in the S&P 500 Index from 6/13/49–6/30/24. The bull market that began on 10/12/22 is considered current and is not included in the “average bull market” calculations. Bear markets are peak-to-trough price declines of 20% or more in the S&P 500. Bull markets are all other periods. Returns are in USD and are shown on a logarithmic scale. Past results are not predictive of results in future periods.

Fact #2: After large declines, markets have recovered relatively quickly

 

We don’t know exactly what the next recovery will look like, but historically stocks have often recovered sharply following steep downturns. We tracked the 18 biggest market declines since the Great Depression, and in each case the S&P 500 Index was higher five years later. Annual returns over those five-year periods averaged more than 18%.

 

Returns have often been strongest after the sharpest declines, bouncing back quickly from market bottoms. The first year following the five biggest bear markets since 1929 averaged 70.9%, underscoring the importance of staying invested and avoiding the urge to abandon stocks during market volatility. While these have been the average returns during these recoveries, each one has differed, and it's quite possible any future recovery could be more muted.

The worst bear markets were all followed by strong recoveries

This table displays the five biggest market declines since 1929 and the subsequent return for the next five calendar years after the decline ended. During the period September 7, 1929, to June 1, 1932, the market declined 86.2%. The subsequent five-year returns were 137.6%, 0.5%, 6.4%, 56.7% and 16.5%, for an average annualized five-year return of 35.9%. During the period March 6, 1937, to April 28, 1942, the market declined 60.0%. The subsequent five-year returns were 64.3%, 9.0%, 31.1%, 32.2% and –19.9%, for an average annualized five-year return of 20.0%. During the period January 11, 1973, to October 3, 1974, the market declined 48.2%. The subsequent five-year returns were 44.4%, 26.0%, – 2.9%, 11.8% and 12.8%, for an average annualized five-year return of 17.4%. During the period March 24, 2000, to October 9, 2002, the market declined 49.1%. The subsequent fiveyear returns were 36.2%, 9.9%, 8.5%, 15.1% and 18.1%, for an average annualized five-year return of 17.2%. During the period October 9, 2007, to March 9, 2009, the market declined 56.8%. The subsequent five-year returns were 72.3%, 18.1%, 6.1%, 15.7% and 23.6%, for an average annualized five-year return of 25.3%. Across all five of these periods, the average subsequent five-year returns after the end of the decline were 70.9%, 12.7%, 9.8%, 26.3% and 10.2%, for an average annualized five-year return of 23.1%.

Sources: Capital Group, RIMES, Standard & Poor’s. As of 6/30/24. Market declines are based on the five largest price return declines in the S&P 500’s value (excluding dividends and/or distributions) with 100% recovery after each decline. The return for each of the five years after a low is a 12-month return based on the date of the low and is shown in total returns (includes reinvested dividends and/or distributions). Investors cannot invest directly in an index. Past results are not predictive of results in future periods.

Fact #3: Some of the world’s leading companies were born during market recoveries

 

Many companies got their start during tough economic periods and have gone on to become household names.

 

To highlight just a few: McDonald’s emerged in 1948 following a downturn caused by the U.S. government’s demobilization from a wartime economy. Walmart came along 14 years later, around the time of the “Flash Crash of 1962” — a period when the S&P 500 Index declined 27%. Airbus, Microsoft and Starbucks were founded during the stagflation era of the 1970s — a decade marked by two recessions and one of the worst bear markets in U.S. history. Not long after, Steve Jobs walked into his garage and started a small computer company called Apple.

 

History has shown that strong businesses find a way to survive and even thrive when times are tough. Those that can adapt to difficult conditions and become stronger have often made attractive long-term investments.

 

Bottom-up, fundamental research is key to separating companies that may lead a market recovery, and those more likely to be left behind.

Many businesses got their start amid volatile markets

The chart shows a timeline from January 1940 through June 2024 of bull and bear markets and examples of notable companies that were founded during or shortly after bear markets. The companies include: McDonald’s (1948), Medtronic (1949), Hyatt (1957), Walmart (1962), Nike (1964), Airbus (1970), Starbucks (1971), Microsoft (1975), Apple (1976), Adobe (1982), Taiwan Semiconductor Manufacturing Company (1987), Gilead (1987), Tesla (2003), Facebook (2004), Uber (2009), Zoom (2011).

Source: Capital Group. As of 6/30/24. Bear markets are peak-to-trough price declines of 20% or more in the S&P 500. Bull markets are all other periods.

3 mistakes investors should avoid

 

Mistake #1: Trying to time markets

 

It’s time, not timing, that matters in investing. Taking your money out of the market on the way down means that if you don’t get back in at exactly the right time, you can’t capture the full benefit of any recovery.

 

Consider this example of a hypothetical $10,000 investment in the S&P 500 Index made on July 1, 2014, and held for 10 years. Staying invested through the two bear markets during that period may have been tough, but this patient investor’s portfolio would have nearly tripled. If that investor had instead tried to time the market and missed even some of the best days, it would have significantly hurt their long-term results — and the more missed “good” days, the more missed opportunities.

 

Investors who are more hesitant to put all their excess capital to work at once may want to consider dollar cost averaging in volatile markets. Dollar cost averaging during a decline allows you to purchase more shares at a lower average cost, and when markets eventually rise, those extra shares can enhance your portfolio's value.

Missing just a few of the market’s best days can hurt investment returns

Chart that shows the value of a hypothetical $10,000 investment in the S&P 500 Index, excluding dividends, from July 1, 2014, to June 30, 2024. The chart shows the ending value under five scenarios: invested the entire period, missing the 10 best days, missing the 20 best days, missing the 30 best days and missing the 40 best days. The ending values in these scenarios were $27,856, $15,255 (lost 45% of the value compared to being invested the entire period), $11,080 (lost 60%), $8,534 (lost 69%) and $6,699 (lost 76%), respectively.

Sources: RIMES, Standard & Poor’s. As of 6/30/24. Values in USD and excludes the impact of dividends. Past results are not predictive of results in future periods. Regular investing, or dollar cost averaging, does not ensure a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.

Mistake #2: Assuming today’s negative headlines make it a bad time to invest

 

Today’s economic and geopolitical challenges may seem unprecedented, but a look through history shows that there have always been reasons not to invest. Despite negative headlines, the market’s long-term trend has always been positive. In fact, great investment opportunities often emerge when investors are feeling most pessimistic.

 

Consider a hypothetical investment in the S&P 500 on the day Pearl Harbor was bombed on December 7, 1941. Someone who stayed invested for the next 10 years would have averaged a 16% annual return. Likewise, a hypothetical $10,000 investment in the S&P 500 on the day Lehman Brothers declared bankruptcy on September 15, 2008, would have grown to over $30,000 10 years later. History has provided numerous examples of this.

 

Hear more about this topic

 

Mistake #3: Focusing too much on the short term

 

Market volatility is especially uncomfortable when you focus on short-term ups and downs. Instead, extend your time horizon to focus on the long-term growth of your investments and the progress you’ve made toward your goals.

 

Consider the chart below that shows contrasting perspectives of the same hypothetical investment. The short-term view is one that many investors have of their portfolios — tracing returns over short periods of time. The long-term view plots the same exact investment over the same period but shows annual change in the portfolio value invested instead. With this perspective, the short-term fluctuations of the first chart have smoothed out over time, and the picture of a growing portfolio becomes clearer.

Two views of the same investment tell a very different story

The chart shows two views of the S&P 500 Index returns from June 30, 2014, to June 30, 2024. The line chart represents the short-term view and shows the volatility with a lot of variation up and down of monthly returns. The area chart represents the long-term view of the same period and shows a smooth increase from an initial hypothetical $10,000 investment that grew steadily to over $33,500 by the end of the 10-year period.

Source: Standard & Poor’s. Short-term view represents the S&P 500 Index and reflects monthly total returns from 6/30/14 through 6/30/24. Long-term view represented by a hypothetical $10,000 initial investment in the same index from 6/30/14 through 6/30/24.

3 actions to consider in portfolios

 

Action #1: Run a portfolio checkup

 

When markets are choppy, investors often shift assets from stocks and bonds into the perceived safe haven of cash and cash alternatives. With money market assets reaching a record level of $6.1 trillion (as represented by Investment Company Institute Money Market Fund Assets as of July 31, 2024), many investors’ portfolios may have become misaligned with their long-term goals. To get back on track, investors may want to examine their portfolios to ensure they are well-diversified and in line with their investment objectives.

 

Capital Group can help. We offer financial professionals the opportunity to conduct an in-depth analysis with our team of portfolio consultants. And if you’re an investor, now may be a good time to talk to your financial professional about having a portfolio checkup.

 

Action #2: Review your bond portfolio

 

A fixed income allocation may help to soften short-term market noise during periods of volatility and help investors remain focused on longer term goals. When evaluating your bond portfolio, consider these three steps:

  • Upgrade your core: A core bond allocation can provide resilience amid equity uncertainty, while active, research-driven investing seeks to add potential upside when equities recover.
  • Selectively pursue enhanced income: When stocks thrive, credit often does too. But consider a flexible, income-driven bond fund that can adjust based on shifting market conditions.
  • Consider short-term bonds: Following a deep market correction, pivoting from the ultra-safe nature of cash may be daunting. Short-term bonds offer anxious investors an allocation which seeks to keep capital preservation in mind with stronger income potential than cash alternatives.

 

Action #3: Expand your horizons

 

In uncertain times, it can be natural to narrow your perspective and focus where you’re most comfortable. But when you can broaden your horizons, you may be able to benefit from the growth potential of companies in a variety of industries and markets.

 

And even if you think U.S. markets have bottomed and are poised for a strong recovery, don’t assume all the best stocks will come from America. Although the S&P 500 index has outpaced its international peers over the last decade, eighty percent of the top-returning stocks each year were from companies based on foreign soil.

 

Investors seeking additional global or international exposure may want to consider funds with flexible mandates that allow their managers to choose from the best companies, no matter where they are located.

Most of the top stocks each year have come from outside the U.S.

The chart shows the number of the top 50 stocks each year since 2015, grouped into four categories based on company location: United States, developed international, China and emerging markets (excluding China). Over the period shown, U.S. representation among the top 50 stocks varied between three and 22. Developed international ranged between four and 27. China ranged between zero and 32. Emerging markets (excluding China) ranged between six and 22. Overall, there is a wide distribution of where the companies representing the top stocks were located, indicating that there isn’t a single region that consistently accounts for the top stocks each year.

Sources: MSCI, RIMES. 2024 data as of 6/30/24. Returns in U.S. dollars. Top 50 stocks are the companies with the highest total returns in the MSCI ACWI each year.

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MSCI All Country World Index (ACWI) is a free float-adjusted, market capitalization-weighted index that is designed to measure equity market results in the global developed and emerging markets, consisting of more than 40 developed and emerging market country indexes.

 

S&P 500 Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks.

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