October has notoriously been perceived as a bad month for stocks.
The 1929 crash that precipitated the Great Depression, Black Monday in 1987 when the Dow Jones dropped close to 25 per cent in one day, as well as the worst month of the 2008 mortgage bubble and financial crisis all happened in October.
While October can be volatile, historically it has often marked the bottom and turnaround of a down trend. Seasonal analysis makes note of the classic stock market pattern of strength from fall to spring, or roughly October to May, resulting in the famous saying “buy when it snows and sell when it goes.”
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As I write in the middle of October, this current bear market takes on even more significance. How will history repeat itself this year?
Since 1928, there have been 28 bear markets lasting nine and a half months on average and giving up about 35 per cent, on average. This current bear market has already been going on for 10 months in a year greatly influenced by the continuation of war in Ukraine with its impact on commodity supplies, higher consumer prices and rising inflation, all leading to higher interest rates around the world.
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As a result, the S&P 500 U.S. stock market index is now down almost 25 per cent.
Given markets are a forward-looking machine, what could a potential turnaround look like? Over the last 70 years, after U.S. stocks drop 20 per cent or more, it took on average 19 months to recover. But the deeper the bear market, the longer it usually takes to get back to where it was. Some recoveries have taken as much as four, five or almost six years.
If we are in a typical bear market, it could take up to a year and a half to two years to reach new highs after we hit the bottom. However, history is a guide, not a guarantee and rising interest rates can make for a different investing environment.
Long-term analysis shows that even during the last eight rate rising cycles since 1970, which have lasted on average about two and a half years, the broad-based U.S. stock market still moved up on average around seven per cent during those tightening phases.
Furthermore, even six months to a year after an initial rate increase, U.S. stocks have still moved up around five per cent. Based on past trading patterns, rising interest rates may not have as much of an impact as we fear.
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At the same time, concerns of recession continue to build. So, with all this in mind, will the stock market downturn continue? Have we reached a bottom? Could it ultimately take one, two or three years to recover?
Let’s take a look at how long and how high the subsequent bull markets usually go. While so many economic, social and political factors like the levels of interest rates, changing technology and wars will all affect the performance of stocks, history provides some interesting insights.
After a bear market, when stocks are finally ready for their next move higher, bull markets have lasted five years on average but can be as short as two years or as long as 11 years. During those bull runs, the average annual return has been about 21 per cent but has ranged between 14 and 36 per cent annualized.
Once again, history is a guide, not a guarantee and every bear market is different. This one has seen a very dramatic and quick increase in interest rates, making for the fastest rate rise in history, the highest inflation in 40 years, along with a major war between Russia and Ukraine.
All this makes for some unique dynamics from a historical perspective. Assets have gotten cheap, and may get cheaper, but good long-term solid investment opportunities at reasonable prices will emerge.
So, will the stock market downturn continue? Have we reached a bottom? Will it ultimately take one, two or more years, or less, to recover? How long will the next bull market last?
We don’t know the answers but doing a bit of homework and planning can help prepare you for the long-term.
