How long does a stock market recovery take?

Stock market history is littered with ‘bear markets’, generally considered to falls of more than 20% from a previous peak, as well as lots of smaller downturns. If a decline is more than 10% but less than 20% it is usually considered to be a ‘correction’. Anything less than that is just seen as ‘noise’, choppy market action without a defined trend.

Past corrections and even bear markets tend to fade in importance over time. They appear as blips in the long-term charts as time marches on. Yet they can be incredibly painful during the moment. As fear stalks investors it can be easy to give up or sell out at just the wrong moment.

That’s because bear markets sow the seeds of bull markets – periods of positive returns – and once sentiment improves investors can reap the rewards of investing in a downturn. But if you don’t have money to ‘buy the dip’ how long do you have to wait until things get better and you recoup losses?

It tends to depend on the market and how bad the downturn is in the first place, not least because it takes longer to recover a greater amount of lost ground. Recoveries from seismic events are also protracted because the shock and the economic consequences are larger.

History of stock market crashes and recoveries in the US

The table below shows the significant US stock market downturns over the past 30 years and how long the recovery took.

Source: FE Analytics; S&P 500 index, total return calculation with income reinvested

The Covid crisis and subsequent rebound was unusual because the duration of the recovery was so short – only 141 days for investors to get back to where they started. This was because of the extraordinary and rapid response from authorities in terms of supporting businesses and consumers, as well as the flood of new money into the system through ‘quantitative easing’.

In contrast, the collapse of the dotcom bubble and the global financial crisis were episodes that knocked markets for a much longer period and recovery was drawn out. In the early 2000s interest rates rose uncomfortably at a time when asset prices were elevated. There are some echoes in today’s environment, but the overvaluation of tech stock at the turn of the millennium was far more extreme.

The most significant economic crisis of the past thirty years was the Global Financial Crisis of 2007-09. It was a period that saw the collapse of US investment bank Lehman Brothers, as well as the demise of Northern Rock in the UK, after a housing downturn in the US housing market triggered huge losses on financial products that were comprised of mortgage debt.

This was the most severe downturn in my career, and it was a truly nail-biting time. During the darkest days, investors didn’t believe authorities had control of the situation and there appeared to be no end in sight. Recovery would have been much longer without the novel approach of quantitative easing, which put a floor under asset prices and repaired febrile confidence.

How to profit in bull and bear markets

The lesson from these bear market episodes is that the best time to invest is at the point of maximum pessimism and pain when many investors have abandoned hope or have simply run out of dry powder to commit to markets. This is the point at which most people are thinking “I must be mad to invest now”. Such is the psychological challenge of investing: It tends to make you want to do the wrong thing.

The characteristics of bull and bear markets exacerbate this problem. Bull markets often happen almost by stealth. Amid the usual background noise, prices inch up over the months and years. It is typically slow and incremental progress, though big rises can draw in speculative activity and make things more unstable. All seems calm and well with the world for several years, perhaps even the best part of a decade. Then, out of the blue, something happens. It’s something few predicted (otherwise it would be factored into the prices of assets already) and it is BIG NEWS. Or, in the case of the dotcom aftermath, the trigger is nebulous. Confidence takes a slight knock and gradually ebbing sentiment starts to turn to fear and panic.

Either way, corrections and bear markets, the down periods, usually happen much faster than the up periods. Stocks go up more than they go down over the long term, but when they go down it happens quicker – and it’s almost always more newsworthy. You almost never see headlines in the mainstream media about share markets soaring higher.

Read more: Bear market vs bull market – what are the differences?

How to invest in a down market

Fortunately, there is a way to counter the frustrating price action that markets tend to serve up. A strategy of investing at regular intervals – and ignoring trying to time the market – can remove any emotional reaction from the equation during a bear market, ensuring you are putting money to work at various price levels. Provided your investments are well spread and not reliant on one or a few areas or individual companies, this can work effectively – provided markets recover sufficiently in your investment timeframe.

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