Will McKenna: This week on Capital Ideas we've got a Guide to market recoveries. This episode is based on a Capital Group research report in which we studied every bear market and recovery dating back to the Great Depression and found 3 key facts about recoveries that you should know. I'm your host Will McKenna and I'm going to summarize it for you in 5 minutes. Let's get into it.
#1: Market recoveries have been much longer and stronger than downturns.
Bear markets can feel like they last forever when we’re in them, but the good news is they have been relatively short compared to market recoveries.
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, lasting 67 months.
The difference in returns has been just as dramatic. While bear markets have averaged a 33% decline, bull markets have delivered an average 265% gain on a cumulative basis.
But recoveries are rarely a smooth ride. Investors often have to withstand scary headlines, market volatility and additional equity declines along the way. Those who find the courage and conviction to stick to their long-term plan are often rewarded as markets bounce back.
#2: After large declines, markets have recovered relatively quickly.
History shows us that 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 was higher five years later. What's more, the returns over those five- year periods averaged more than 18% per year.
Not surprisingly, returns have often been strongest after the steepest declines, bouncing back quickly from market bottoms. The first year following the five biggest bear markets over the last 90 years averaged 71%, underscoring the importance of staying invested and avoiding the urge to abandon stocks during market volatility.
#3: Many leading companies got their start during periods of uncertainty 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 that, 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. Our job as active managers is to try to determine which companies may help lead a market recovery, and which are more likely to be left behind.
Ok, there you have it. You can find the complete “Guide to market recoveries” report on the Capital Ideas site. If you liked what you heard today, please follow us on your favorite podcast platform. Thanks for listening.
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