Or equally importantly – how long do they take to recover?
Recently a financial commentator was heard exuberantly announcing that times are tough, but don’t worry in a couple of years the market will recover its recent losses.
Oh really?
That doesn’t sound too plausible, although if last year taught us anything it is that just about anything is possible, however improbable!
Intuitively we know that there is way too much damage done for this market to regain its losses quickly.This is the largest market decline since the 1929 slide and whilst that market did eventually recover to its 1929 highs that took some while as we will see in a moment.
We should also remember that on average markets fall at approximately three times the speed that they climb.There are many credible explanations for this phenomenon and whilst it is a very crude tool to put too much faith in, it does provide a rough benchmark of what is reasonable to expect (once the market hits the bottoms of course).
If a bear market from peak to trough lasts 2 or even 3 years, then we should be thinking roughly in terms of 6 to 9 years for a complete recovery to the previous highs.This factor of three is a widely known average across all markets and is not specific to the stock market per se.
We looked back at all the major declines in the Dow Jones over the last century to put the current market into some context and here are the results.
The 1929 decline was obviously far worse than the current market with a staggering 89% peak to trough loss.However it is the time that we were particularly interested in for this exercise.A decline taking approximately 3 years took a whopping 26 years to be recovered.The market fell roughly 8 times as fast as it recovered.
The second worse decline was in 1973, although at 47% this was less bad than we have seen so far this time!This bear market lasted approximately 2 years and took 10 years to be fully recovered from.So it took 5 times as long going back up as coming down.
The two more recent and less severe declines had recovery periods shorter in duration:1987 was only a 3 month “hit”, but still took 2 years to recover. So about 8 times as long.
Whilst the 2000 decline put in a performance much better than the 3 times average, taking only 4 years to recover from a 33 month decline.It is also worth remembering that this was also the least severe fall in percentage terms and logically the amount of damage done would also have an effect on the recovery time.Hence the contrast with 1929 at the other end of the spectrum.
Obviously our current bear market hasn’t quite reached 2 years in duration yet, but neither is there any evidence yet of any bottom being found.But even if we were to march straight back up from here, the prospect of regaining those 2007 highs in just a couple of years is about as likely as a win on the lottery!At some point in time we will get there, it just won’t be anything like as quick as most people believe or hope.
Article by Simon Townshend, head trader at Hedgehog LLC.Hedgehog is a private fund based in the Isle of Man utilising a proprietary low risk, high yield strategy that has averaged approximately 40% annual profits since its 2003 inception.www.hedgehog.im
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Note: Simon and I have been working together for the last year and a half.He has written several times about how our relationship has helped him in his trading.However, I have gained significantly from our relationship as Simon is one of the best examples of how working with talented traders has helped me grow as a mentor.In the process of working with Simon, I have become more effective as a coach and, at the same time, made a valuable friend. Jeff
