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How stock markets perform after heavy falls

An article by Schroders

Stock markets have tumbled in the midst of the coronavirus outbreak. Schroders’ analysis shows how the biggest one-day falls in the past have been followed by substantial returns over the subsequent five years.

Coronavirus concerns have swept through financial markets. Globally, stocks have endured some of their worst performances since the days of the financial crisis.

For instance, the US stock market, as measured by the S&P 500, fell 7.6% in one day on 9 March 2020, its fifth worst trading day since 1988.

On the same day, Australian stocks, as measured by the S&P/ASX 200 Share Index, fell sharply. It dropped 7.4%.

What next?

It is impossible to predict what may happen next. The severity of the disease and its long-term economic impacts are still yet to be seen.

However, while the stock market has been quick to react, history shows it has a tendency to bounce back strongly over time.

How the stock market bounces back

Using the US stock market as an example, the past three decades show the strongest five-year rebound in the US brought a return of 164%. That is an annualised return of 21% in the five years after a 6.7% fall for the S&P on 20 November 2008.

That date was during a particularly gloomy phase of the 2008-09 financial crisis.

Given the abject mood at the time, investors may have struggled to believe that an investment of $10,000 made in the market at the start of that turbulent day would have grown to $26,400 within five years, before charges.

Of course, past performance is not guaranteed to be repeated in the future. The returns are illustrative and do not include any costs or fees. But the data underlines the historic resilience of shares over longer timeframes, even following shocks.

The US stock market's ten worst days and their rebounds

A short history of the stock market’s worst days

As the table above shows, the pattern is repeated on many other of the ten worst one-day crashes.

Falls associated with the global financial crisis, including the eurozone debt crisis, account for seven of the ten worst days the US stock market has endured since 1989.

The most severe was a 9.0% fall on 15 October 2008. This was followed by a five-year return of 109%, or an annual equivalent of 15.9%.

The credit crisis escalated into a full-blown financial crisis in 2008 with the collapse of the investment bank Bear Stearns, and worsened with the failure of Lehman Brothers in September of that year. This created a domino-effect among banks and insurers. Forced mergers and government bailouts were required to stabilise markets.

Such crisis moments attract contrarian investors, such as the feted investor Warren Buffett who invested $5 billion in Goldman Sachs in September 2008.

And the worst of the rest

The stock market falls during the post-dotcom 2000 to 2003 slump did not make the top ten. A 5.8% fall on 14 April 2000 was the 12th worst. It was followed by a 7.4% loss five years later.

The data doesn't stretch back to Black Monday in October 1987 when US stocks fell 22% in a day, their biggest ever one-day fall.

The strongest Australian market rebound

Similar data was collated by Schroders for the Australian equity market going back to June 1 1992 using data for the All Ordinaries Index. The strongest recovery from the ten worst days was a 112% five-year gain following the September 11, 2001 terrorist attacks on New York.

Overall, the average recovery from the ten worst days in Australian markets over the following 5 years was a 67% return.

Again, like the S&P 500, the Australian stock market has provided healthy returns, providing you can stomach the ups and downs over the last three decades.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

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