When will the stock market bottom out and recover?
Learn everything you need to know about the potential for a stock market recovery in 2020 – including what we can learn from previous crises, what makes the coronavirus crash unique and some key indicators to watch.
Indices have recovered some of their losses since, with the S&P climbing back up above 2900. Investor confidence seems to be returning, but are we in the eye of the storm – and when might we see a full recovery?
There are four aspects to consider when predicting where stocks go from here:
- How long stock markets usually take to recover from crashes
- When we might see a recovery from the coronavirus crash
- What could prevent a recovery
- Which indicators you should be watching
Let’s take a look at each in more detail.
How long do stock market crashes usually take to recover?
There are countless variables at play in a stock market crash, which makes analysing them as a whole difficult – and complicates any attempt to calculate a ‘usual’ length of time for a recovery. You need to examine the individual factors at play in each event.
Take the Great Depression as an example. It wiped 86.2% off the value of the stock market in 1929, which took a staggering 6249 days (or just over 17 years) to reach a new peak again. However, that 17-year period also includes WW2, which muddies the picture somewhat. And back then, the value of currencies was still pegged to the price of gold – the US dollar left the gold standard in 1933 – which hampered the recovery.
So applying lessons from the Wall Street crash to other bear trends presents problems. But what if you expand the data set to include every time the S&P 500 has fallen more than 20% in the last 65 years?
Charting the S&P’s crashes
The S&P 500 has fallen by more than 20% nine times since its inception in 1957. By plotting the size of those falls against the time it took markets to bounce back, a rough pattern presents itself: the S&P appears to recover faster after smaller crashes, with bigger ones causing lasting damage.
However, you can also see that the two most recent events – in 2001 and 2008 – don't seem to conform to this pattern. The last crash that does was back in 1987. So will the trend still hold today?
It may be the case that crash-recovery cycles have got shorter over time, particularly for larger falls. The table below shows the relative recovery rates of the four crashes that took at least 40% off the value of the S&P 500:
|Year||Maximum loss||Days to get back to all-time highs||Recovery per day|
As you can see, each recovery has been faster than the last. The S&P recovered three times as fast from its 2008 fall than in 1929, and 50% quicker than in 1973.
Do markets grow faster after a crash?
According to Index Fund Investors, the S&P 500 has grown just under 10% annually on average since its inception. After its nine crashes, it seems to have recovered at a far faster rate.
Our research shows that the S&P 500 grows by around 20% per year on average after crashes, until it hits a new record high. It has grown faster than 10% per year after all except two of its crashes: in 1973 and 2001. These wiped 48% and 49% off the S&P respectively – adding further weight to the theory that larger crashes slow growth more.
This assumes that we are now at the bottom of the Covid-19 crash, however. And evidence from previous bear markets suggests that this time around, that might not be the case.
Comparing Covid-19 to other crashes
In the Global Financial Crisis (GFC), for example, the S&P was nowhere near bottoming out two months after the initial fall. Markets started falling in October 2007, but didn’t bottom until February 2009. At this point in that crisis, nobody knew how bad the fallout was going to be.
The symptoms of the GFC were vastly different from the crash today, but there are similarities between the two. Both, for example, came at the end of extended bull runs. In 2007, the S&P had been posting impressive growth for almost five years. This year, we saw the end of a record-breaking and decade-long bull market.
If the Covid-19 crash ends up being as destructive as the GFC, then it’s far too early to start thinking about a potential recovery.
On the other hand, shares do recover without another drop, then 2020 may end up being most similar to the Black Monday crash of 1987. That’s the only fall which comes close to matching it in terms of speed and severity.
In 1987, the S&P dropped 28% in 15 days from 2 October. It hit its bottom around two months later.
If the Covid-19 crash has bottomed, meanwhile, then it hit that point in just over one month, after dropping around 33%. If its recovery plays out similarly to in 1987, then we may see the S&P 500 hit another peak in around 650 days. That’s slightly faster than our model suggests.
Is this crash too unique to compare?
Some analysts question the validity of using previous crashes to evaluate current or future ones. After all, the unique circumstances surrounding each event have a significant impact on how fast the markets fall – and how they recover afterwards.
The Covid-19 crash, for example, was also accompanied by one of the worst oil price falls of all time. The variables surrounding this fall in oil – including a bruising price war between some of the world’s biggest suppliers – make the situation in 2020 unique.
The speed of the coronavirus crash, meanwhile, also marks it as something new. Indices went from record highs into a bear market at record speed. In 1987 – the crash closest to this one in terms of speed – the S&P 500 had already retraced slightly off its peak before the real turbulence set in. In 2020, volatility almost spiked overnight.
But what really sets the Covid-19 crash apart is that its chief cause was external, not financial. Every other crash was caused by long-standing market issues coming to a head – whether the overbuying of tech stocks or mispriced subprime mortgages.
The 2020 fall, though, was caused by a pandemic. The global economy has never seen a situation like this one before, with a virus forcing businesses around the world to close and plunging economies into recession. So lessons from the past may have no bearing on this situation whatsoever.
How resilient will the virus be?
At the moment, coronavirus is the single biggest driver of market volatility. That’s an issue because, for now, the pandemic is too recent to make concrete predictions about what might happen next.
It appears that most major economies around the world are beginning to get coronavirus under control. China and other Asian nations are mostly back up and running; the eurozone and the US are looking at easing restrictions and calls are growing for a post-lockdown plan in the UK.
But any return to normality will be phased instead of instant. What form these phases take – and how quickly each economy can move through them – will have a significant impact on financial markets. If offices and retailers still aren’t fully open 12 months down the line, then economies will take far longer to bounce back.
Then you have the prospect of a second round of coronavirus, which could cause damage on a far greater scale than the first. In this eventuality, government stimulus might not be enough to prevent a full market rout. The medical cost, too, might be grave – the second round of the Spanish Flu epidemic in 1918 was far more deadly than the first.
What more can central banks do?
The 2008 financial crisis saw a new level of monetary intervention from central banks, with the European Central Bank (ECB), Federal Reserve (Fed) and Bank of England (BoE) slashing rates to new record lows and embarking on massive quantitative easing (QE) schemes.
Those measures led to the extended bull run that preceded this crash. But the fallout from the GFC was so vast that many central banks were still effectively zero bound at the beginning of 2020. When your rates are already close to zero, there’s only so much they can do when recession strikes again.
Central banks around the world responded quickly to the Covid-19 crisis by cutting rates back, but short of entering into negative territory, their arsenals are depleted. And the jury is still out on how successful QE was at helping spur a recovery from the 2008 crash.
So far, governments have stepped in to fill the gap, announcing huge interventions to keep unemployment at bay and encourage spending. It remains to be seen whether they’ll be able to keep that up over an extended period.
How bad will the fallout be?
The ‘new Black Monday’ of 9 March 2020 came about as investors realised how damaging coronavirus was going to be on businesses around the world. Travel companies were particularly hit, as they faced months of little to no business whatsoever. Hospitality companies, too, faced plummeting revenues.
Share prices have stabilised since, but we don’t yet know what the post-corona economic landscape looks like.
Early data points to severe recessions across almost all major economies. That may match coronavirus in terms of disruption to businesses, but as yet, we don’t know the size of the issue. Some early indicators point to the worst global recession since WW2.
We also don’t know how much the world will change after coronavirus. In Germany, small businesses have reopened but consumers appear reluctant to visit them. A survey in the US revealed that two-thirds of consumers feel uncomfortable about visiting a mall now. Politics, too, might change after coronavirus has highlighted just how unequal the world is.
How much is oil hurting stocks?
The impact of the severe oil price crash from earlier in the year may have been underestimated, despite oil futures dropping briefly into negative territory in early April. That unprecedented move was brought about as futures traders struggled to offload their contracts before they expired – meaning they’d have to take delivery.
So far, the Organization of the Petroleum Exporting Countries' (OPEC’s) reaction to the oil price crash has been found wanting. Cutting supply by almost 10% has done little in the face of plummeting demand, which may explain why the announcement of the cut failed to move oil’s price by much.
For some companies – including miners and airlines – low oil prices are a boon. But the US energy industry is a huge driver of employment and growth to the economy. According to the Federal Reserve Bank of Kansas, up to 40% of oil and gas providers in the US could face bankruptcy if oil fails to bounce back soon. That will hurt the economy as a whole, and act as a drag on any recovery.
Was the crash long overdue?
The final question is whether coronavirus was just the spark for a selloff that was already on the cards.
At the beginning of 2020, the S&P 500 was at the crest of its longest bull run of all time. In ten years, it had grown just shy of 200%. Trade wars, slowing economic growth and falling business confidence had all failed to seriously dent investor optimism.
History tells us that uptrends as long as that are almost always followed by retracement. If traders took coronavirus as an opportunity for a long-overdue course correction, then it may be some time yet before record highs are seen again.
What are the key indicators to watch?
When tracking how long the recovery might last from here, there are a few areas to watch. Firstly, how the world is dealing with the coronavirus itself. Then how global economies are faring throughout the crisis. And finally, how the markets themselves are faring.
There are lots of ways to monitor how the coronavirus response is progressing. The simplest is to follow the infection and mortality figures reported by most media outlets, which offer a glimpse at whether the virus is under control.
Many governments use ‘R’ to decide when lockdown measures can be eased. R measures how many people will be infected by a single person with the virus. If it’s above one, then infection will spread exponentially under normal conditions. If it drops below one, then quarantine measures may no longer be needed.
It’s also worthwhile tracking the progress of the various vaccines and cures. While these still appear some way off, positive news may well boost global stocks.
For now, the economic indicators to track are all about assessing the possible size of the impending global recession. That means even more scrutiny for gross domestic product (GDP) releases, as investors and analysts try to work out which countries will be affected most. The International Monetary Fund (IMF) has predicted recessions for almost every major economy – but does say that the world could return to growth next year if coronavirus risk recedes early enough in 2020.
Employment is also an important metric to follow. The US and UK saw record numbers of new benefit claimants in the first months of the crisis, with almost a million British people applying in just two weeks. Watching UK employment reports and US non-farm payrolls will indicate whether things are getting better or worse in the coming weeks.
Finally, it’s worth following the status of any new stimulus packages from governments. In the US, the massive fiscal stimulus bumped stock markets. Any new spending could have a similar effect.
Technical indicators can signal whether a market is about to recover – or if a new bear trend is on the horizon.
Volume is often used as a simple indicator of market movement, particularly when attempting to spot the end of a trend. In a downtrend, lower volume could be a sign that the sellers who have been driving prices lower are running out of steam, which may mean buyers are about to step in.
Volume spiked on the S&P 500 as it crashed, but has petered out since. Renewed trading could confirm another bear trend, or speed up the recovery.
Bollinger bands, meanwhile, are useful for monitoring volatility. They take the form of two lines above and below a market’s moving average. Those bands are the moving average’s standard deviation, which is a measure of volatility. If they widen, it’s a sign that the market is in a period of growing volatility. If they remain narrow, the market is calm.
You could also follow the volatility index (VIX). The VIX offers a glimpse at the sentiment of traders by tracking how many S&P 500 options are being bought. It spiked in mid-March, but has been on the wane since. Another spike could coincide with new lows across stock indices.
With IG, you can even take your position on where the VIX is headed next.
Do you have to wait for a market bottom?
There are schools of thought, though, that say there’s no point in waiting for markets to drop to their lowest point before investing. And if you’re trading, you don’t have to wait for bull runs to make profits.
Finding valuable investments
Perfectly timing your investments around a bottom is a tricky feat to pull off. Indicators can offer insight into price movement, but even the most experienced investors find it difficult to say when a bull or bear run will cease with 100% confidence.
After taking the effect of crashes into account, stocks outperformed savings accounts, global stocks, UK gilts and 50/50 portfolios from 2004 to 2019:
Stocks took a hit thanks to the GFC, but still turned out better over the long term. If you’d invested in the midst of the crash, you’d still be ahead.
So instead of trying to time the markets, you might be better off choosing some companies that you think offer value now and building a portfolio. Or to take a broad position on a market recovery, you could use exchange traded funds (ETFs) or a smart portfolio to invest in multiple stocks at once.
Trading a bear market
Traders, meanwhile, can short-sell markets before they bottom to earn a profit in bearish conditions.
With CFDs and spread bets, for example, you decide whether to buy or sell a market when you open a position. If you sell the FTSE 100 for £5 per point with a spread bet, then you’ll earn £5 for every point that the index moves down – and lose £5 for every point it moves up. So you can trade when you think that shares are headed down, or even hedge against long positions you hold in your portfolio.
Stock market recoveries summed up
- The S&P 500 has dropped over 20% nine times before in its history
- If the S&P 500 recovers from the coronavirus at the same rate as other crashes, it could be back at all-time highs in around two years
- However, we don’t yet know if markets will drop further, or continue to bounce back
- Investors don’t have to time the markets, while traders can profit from bear runs by short-selling
- Open a live account to take your position
* Prior to the formation of the S&P 500 in 1957, Standard and Poor's published a 90-stock index, computed daily, which is used for the 1929 crash in this data set.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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