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Market Volatility
Guide to stock market recoveries

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

- 3 mistakes investors should avoid

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 US bear market since 1950 has lasted 12 months. The average US 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

Sources: Capital Group, RIMES, Standard & Poor’s. Includes daily returns in the S&P 500 Index from 13/6/49–30/6/23. The bull market that began on 12/10/22 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 US bear markets were all followed by strong recoveries

Sources: Capital Group, RIMES, Standard & Poor’s. As of 30/6/23. 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 US government’s demobilisation 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

Source: Capital Group. As of 30/6/23. 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 US$10,000 investment in the S&P 500 Index made on 1 July 2013 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

Sources: RIMES, Standard & Poor’s. As of 30/6/23. Values in USD and excludes the impact of dividends. Past results are not predictive of results in future periods.

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

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

Sources: Standard & Poor’s. Short-term view represents the S&P 500 Index and reflects monthly total returns from 30/6/13 through 30/6/23. Long-term view represented by a hypothetical US$10,000 initial investment in the same index from 30/6/13 through 30/6/23.

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Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.

Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.