The Third Pig

The last couple of posts (here and here), I have been listing some things to be thankful for in this market. Here's # 3.

3.     The Inevitable Market Rebound

This bear market has been the most severe we have seen since the decline of 1929. The good news is that we are not likely to see precipitous declines from here. So, although it is impossible to pick the exact bottom, it would be my guess that we are in the “bottom range”. I feel strongly that over the next 3 to 5 years, the market will be much much higher. And according to the data below, most of that recovery will come in the first few days and months.

On average, using the last nine bear/bull markets as a proxy, 87% of the S&P 500’s high has been recovered in the first year of the market bottom. On average, all of the prior high, and then some [122%], has been recovered by the second year. This is represented in the following chart [click image for larger view]:

For example, on August 25, 1987 (light blue highlight) the S&P 500 reached a high of 336.77. Then it began a drop over the next three months, which included the infamous Black Monday when the market dropped more than 20% in one day, and by December 4, 1987 the market had fallen to 223.92, representing a 34% drop over that period and a loss of 112.85 points off the index. However, within one year of the bottom, the market had returned to 277.59, rebounding 53.67 points, a 24% return, from the bottom and recovering 48% of the loss of the previous high. By the second year, the market had stood at 348.55, recovering a full 110% of the previous high of 336.77.

In fact, in most instances, you will recover a full third of what you’ve lost in the first 40 days into a new bull market. Buy and hold is not dead. No one can time the market so it pays to stay fully invested even in times of uncertainty.

Disclosure: I and the clients of Brick Financial Managment, LLC hold positions in iShares S&P 500 Index ETF (IVV) and ProShares Short S&P 500 Index ETF (SH) but positions may change at any time.