When Will Stocks Recover?

When the S&P 500 declined back to its November low earlier this week, it returned to the almost unknown territory of being 50 per cent lower than its all time high. Only once before in history has the S&P seen a 50 per cent decline, and that was during the Great Depression.

This kind of decline is almost historically unprecedented, which means that all the financial models run by banks failed to anticipate it. They just didn’t think a functioning market could drop this far. It’s a dislocation, market misbehavior, a one-in-10-thousand chance event. And it’s real.

The brightside is that it is still possible to recover from a 50% decline. Even if you bought at the height of the market, you can still make money. Even though the market eventually declined almost 90% during the Depression, it eventually bounced back and made new highs.

How long did that take? That’s the rub. As the chart below from Bespoke Investment Group shows, the S&P didn’t recover for 25 years.

“But by far the most depressing aspect of the 50%+ decline back in the 1930s was how long it took for the index to make a new all-time high.  Following the peak in 1929, the S&P 500 went 6,251 trading days before hitting a new all-time high 25 years later,” Bespoke writes.