Volatility Works on the Upside too!

Robert Ramos |

We are fielding a lot of questions and hearing a lot of TV/internet commentary about how long it will take for stock markets to recover. The true answer to that question is no one knows for sure. Any commentator or newsletter writer that professes to have some crystal ball is just wrong.

However, we can look back at history and see how long it took the S&P 500 to retrace losses. The chart is from LPL, a large broker dealer. (No offense to our broker dealer!!)

You can see for yourself that the average recovery time is about a year. In our minds, that average is rather useless as there are not many data points. So, we look at the range of outcomes. In this case, we see 0.2 to 4 years.

There are a couple of nuggets in this chart most folks won’t see. First, volatility occurs in up markets too. A bear market is a drop of 20% or more. Look at 1976 and 1982, 20+% drops were fully recovered in 0.2 years. That is covering a lot of ground in a very short time.

The full recovery from 2008 may have taken 3.1 years, but: the closing Dow low on March 6, 2009 was 6547 and theclose for the year was 10,548. That is a 61% return in 9 months.
We saw a similar event happen at the end of 2018 thru early 2019.

One other extremely important point: look at the chart closely and you will see one shared outcome in every bear market: the stock market returned to its previous high. The chart doesn’t show this stat, not only was the pre-bear market high recaptured, but it went on to reach new highs. Let that sink in for a second…….

Ok? Now let us do some really basic math together. The Dow Jones Industrial Average (Dow) is currently about 10,000 points below its all time high. To make the math really easy, let us just say the Dow is at 20,000. Can you see the opportunity in front of us before we even type it?

Adding 10,000 point to a Dow at a level of 20,000 is a 50% return. If we can all agree that US stock markets have returned to their previous highs, then we can make a rational assumption that market will return to its previous high. We don’t know how long it will take, but history also suggests that it will not be an extended period of time.Down markets present opportunities to buy low. This market is presenting investors with a bigger than normalopportunity to buy low.

Our final points are these, stock markets tend to overshoot—they go too high and they go too low and stock markets turn positive before the economy.

Have we hit the low for this cycle? We do not know. It does seem a bit early to say that given the current levels of uncertainty. Of course, no one will know for sure that we have bottomed until we are able to view the markets through the clarity of the rear view mirror.

Our goal here is to suggest that the investor who is cognizant of history will see down markets as a buying opportunity. The bigger the market drop the bigger the buying opportunity. Putting idle cash to work when the outlook is most bleak has been historically rewarding.


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