The stock market has always recovered from every crash, no matter how bad the bear market or recession actually was. Even though the stock market recently dropped -39.4% in just 24 days, it is our belief that this year’s “COVID Crash” will be no different than all other crashes. We will recover from this too. Nevertheless, everyone is wondering how long it will take. We asked our analyst to research the situation and get back to us with some ideas. After a discussion with one of our asset managers, he had some great news. “No matter how long it takes, the recovery will be strong.”
Does this mean it will “crash upwards” in a V-shape with the same intensity as the decline? Will the recovery be a protracted U-shape, marked my economic and market malaise? Or will our recovery be more W-shaped with jarring volatility up and down along the way?
Nobody can say, but analysts are leaning towards a U or W-shape. V-shaped recoveries typically happen when the market is recovering from a fake-out, but our economy was badly damaged by this. We are seeing small to medium-sized businesses facing daunting logistics challenges posed by the forced closures of non-essential businesses, stay-at-home orders and social distancing.
Instead of focusing on how we will recover, let’s get back to the question of how long till recovery. The chart below highlights several scenarios:
What this is saying, is that if we expect to recover in one year, we will need an S&P 500 return of 29%. The S&P 500 has had years like this before, but its long-term historical average hovers around 10.5%. We should say such a recovery is possible but not likely.
If we move to the third rung on the ladder (let’s skip one), this is telling us that we would require 10% returns over three consecutive years to get back to normal. This is more in-line with historical long-term averages and well within the realm of possibility.
Skipping one more, and going to the fifth rung on the ladder, we would need 7% per year over five years to recover. This is also entirely conceivable, but five years is a long time!
Thankfully, most of our clients are in highly diversified portfolios, containing bonds in addition to stocks. While it’s true that the addition of bonds in a portfolio would slow down the length of recovery, the existence of bonds in the portfolio prior to the “covid crash” offered some protection. Mathematically, the portfolio does not need to recover as much to make up for lost ground. Consider a 33% drop in an all stock portfolio, which would require a 50% recovery to return to level. A corresponding 25% drop in a stock/bond mix requires a 33% recovery.
Our game plan for recovery is actual quite simple: stay the course. Give your portfolio a chance to recover, because the stock market will recover. If you have questions or concerns about your investment strategy, we invite you to call us and schedule a meeting with your advisor.
~ Erik Laymon, MBA – Portfolio Analyst & Planning Services Manager