There’s a time to swoon and there’s a time to celebrate. Are you in a cabin fever funk or poised for an exciting tomorrow?
And what about your retirement portfolio?
You’ve just experienced the quickest bear market in history (as defined by a 20% drop in the market). That was immediately followed by the quickest bull market in history (as defined by a 20% rise in the market).
Despite this dramatic pendulum of volatility, you probably are wondering how long it might take for your nest egg to rise again.
First, the underlying facts. Many now feel we’re going into a recession. That makes sense. A significant portion of the economy has been abruptly shut down.
Here’s something you may not know. You may think a recession is defined as two consecutive quarters of negative GDP. The National Bureau of Economic Research (NBER), however, defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
A recession is the contraction portion of the never-ending business cycle. It’s a natural part of the economy. NBER business cycle data suggests the average length of the last three recessions is about a year. These include the recessions of 1990, 2001 and 2008/2009. The previous “recession” occurred from 1980 through 1982. NBER indicates it’s actually two recessions (of 11 and 16 months each). It may also be viewed as a single recession of almost three years in length.
Bear in mind, the NBER can wait a year or more before it makes its official announcement.
Unless you’re an economist, however, the length of the recession and when it’s formally declared matter little to you. As an investor, you care more about the average length of a bear market. More importantly, you care about how much time it typically takes to recover from a bear market.
That’s the data you’re most interested in. You may find what history reveals not only thought-provoking, but, perhaps, a bit counter-intuitive.
According to Investopedia, prior to this year we’ve had five bear markets since 1980. One of those bear markets (1987) was not accompanied by a recession. Remember that year. It will surprise you in a moment.
The average length of those five bear markets was 15 months with the average decline roughly 37%. Upon reaching its low point, it took a little more than 26 months for the market to recover those losses. The average pre-bear-market-peak-to-recovery (i.e., the total of the length of the bear market plus the length of the recovery from the market bottom) was nearly 42 months.
That’s just the statistical average. You know the phrase popularized (but not coined) by Mark Twain: “There are three kinds of lies: lies, damned lies, and statistics.” When you glance at the underlying data, you might conclude Samuel Clemens could have been on to something.
The average can mislead you. Indeed, the range of the actual data reveals much more. For example, the length of the bear markets span from as short as three months (1990) to as long as 31 months (2000-2002).
Oddly, the extremes of the market decline don’t quite align with the length. The steepest loss was 56% (2007-2009) while the smallest dip was only 20% (1990).
Here’s where things get a little tricky. When it comes to the time it takes to recover, neither the length of the bear market nor the extent of the market decline are good indicators of how long it takes to return to the pre-bear market levels.
The two longest bear markets, 2000-2002 (31 months) and 1980-1982 (21 months) also happen to represent the shortest (1980 at three months) and longest (2000 at 56 months) recovery times. The total pre-bear-market-peak-to-recovery length mimics this dispersion (24 months for 1980, 87 months for 2000) That’s not a good look in terms of potential correlation.
The two shortest bear markets, 1987 (four months) and 1990 (three months) also feature non-correlative data. It took only four months for the markets to recover in 1990, but 20 months in 1987. Similarly, the pre-bear-market-peak-to-recovery was only seven months for 1990 and 24 months for 1987.
The length of the associated recession offers no insight either. The two longest recessions, 1980-1982 (35 months) and 2007-2009 (19 months) again show extremes in recovery periods. The longest recession featured the shortest recovery period (again, three months from the market bottom; 24 months pre-bear-market-peak-to-recovery) while the most recent recession took more than four years to recover (49 months from the bottom; 66 months pre-bear-market-peak-to-recovery).
If you think that’s confusing, take a look at the bear markets associated with the two shortest recessions, 1990 and 2000 (both nine months). You’d likely guess they would have similar recovery periods. You’d be wrong. While 1990 took only four months to recover, the 2000 recovery took the longest at 56 months.
And this should scare you: the pre-bear-market-peak-to-recovery period were an amazing short (the shortest) seven months for the 1990 bear market and an agonizingly long (the longest) 87 months for the 2000 recession.
In reviewing the data, it appears the amount of the decline is potentially the best indicator for the length of recovery.
The two largest declines, 2007-2009 (56%) and 2000-2002 (49%) also exhibited the longest recovery periods, although not in the order you think. They required 49 months (66 months pre-bear-market-peak-to-recovery) to recover from the largest decline but longer (56 months, 87 months pre-bear-market-peak-to-recovery) to recover from the second largest decline. Still, while the order is reversed, the relative magnitude represents what you might expect.
The two smallest declines, 1990 (20%) and 1980-1982 (27%) also represented the shortest recovery periods (four and three months respectively from the market bottom; seven and 24 months respectively pre-bear-market-peak-to-recovery). Again, the order is flipped but the direction makes sense.
So, what does this mean today for your nest egg?
Most immediately, neither the length of the bear market nor the length of the potential recession can be relied on. Your best bet is to look at the amount of the decline. To date, the 2020 bear market decline peaked at 30%. It has gained more than 20% since then. This places us about half-way to full recovery. And it’s just been about a little more than a month.
If you want to use history as a guide (caveat emptor: “past results do not guarantee future results”), here’s what the data shows.
There are two declines close to the 2020 bear market drop of 30%. We saw a 27% decline in 1980-1982 and a 34% decline in 1987. Bear in mind, there was no recession in 1987, but the longest (and those who lived through may say it was the worst) recession occurred in 1980-1982.
Unfortunately, the recovery data doesn’t make a lot of sense. It took only three months to recover from the nadir of the 1980-1982 bear market (the one with the recession). Contrast this to the 20 months needed to recover from the 1987 crash (the one without the recession).
On the other hand, each took an identical 24 months from pre-bear-market-peak-to-recovery.
What does this data tell you about when your nest egg will rise again?
When it comes to a recession: it’s not great, it’s not terrible.
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