Managing for a Speedier Recovery
Author: Mark Stacey
March 30, 2020
The equity market selloff of the past few weeks has been a white-knuckle experience for investors, but the biggest loss facing them isn’t the temporary setback in share prices – it’s the time it will take for the correction to run its course and rebound to new highs.
In fact, the most certain part of any downturn is the eventual recovery. It’s happened every time since the Great Depression and the market crash of 1929, and it will surely happen again this time around. What is more uncertain, however, is the time it takes for a pullback of 20% or more to run its course and climb back to new all-time highs and above.
Take, for example, all 12 of the S&P 500 bear markets that have occurred over the past 90 years. The average drawdown period was almost 16 months and the average recovery from the bottom was 63 months. In other words, it has taken a total of 79 months on average, or just over six and a half years, for the S&P 500 to fully rebound from past bear markets.
Bear Market Declines (20% +) from S&P 500 All-Time Highs
| Date of All Time High | Max Drawdown in Period | Duration of Drawdown (No. Months) | Date of Recovery in Closing High | Duration to Recovery (No. Months) |
|---|---|---|---|---|
16-Sep-29 | -86.19% | 32.29 | 22-Sep-54 | 297.57 |
2-Aug-56 | -21.63% | 14.62 | 24-Sep-58 | 25.71 |
12-Dec-61 | -27.97% | 6.43 | 3-Sep-63 | 20.67 |
9-Feb-66 | -22.18% | 7.95 | 4-May-67 | 14.76 |
29-Nov-68 | -36.06% | 17.57 | 6-Mar-72 | 39.05 |
11-Jan-73 | -48.20% | 20.76 | 17-Jul-80 | 90.38 |
28-Nov-80 | -27.11% | 20.48 | 3-Nov-82 | 23.24 |
25-Aug-87 | -35.51% | 3.38 | 26-Jul-89 | 23.10 |
24-Mar-00 | -49.15% | 30.33 | 30-May-07 | 85.86 |
9-Oct.07 | -56.78% | 16.90 | 28-Mar-13 | 65.52 |
21-Sep-18 | -20.21% | 3.10 | 29-Apr-19 | 7.10 |
Duration of Drawdown Average: 15.8 months;
Duration to Recovery average: 63 months
Duration of Drawdown Average: 14.15 months;
Duration to Recovery average: 39.53 months
These averages drop considerably when the unparalleled market crash of 1929, which was followed by the Great Depression, is omitted from the equation, but larger selloffs have generally been associated with longer rebounds than those coming on the heels of corrections that have been of a smaller magnitude.
Given this pattern, it seems clear that markets always recover, but the time it takes can vary dramatically, based at least in part on the severity of the correction. And it’s this uncertainty that often poses the biggest risk to investors, especially those who have relatively short time frames for realizing their investment objectives. Think, for instance, of the recovery time that a recent university graduate can afford following a correction versus someone who is the just months away from retirement.
So, what can be done to speed up the rebound? Cutting your losses and running for cover during a rout might seem like a good option. After all, it would potentially reduce the size of the drawdown. But timing the market is incredibly difficult to do, and many who move fully into cash may end up missing a part of the recovery and need even more time getting their portfolio back to square one.
Instead, investors should think of cash as one of several tactics that can be employed to help minimize the potential impact of a correction. These short-term changes in positioning might also include an emphasis on low-volatility stocks or defensive sectors, as well as efforts to high-grade holdings with more quality names, but they should always be considered within the context of a strategically diversified portfolio that is designed to mitigate losses throughout a market cycle. Such a portfolio includes exposure to stocks, bonds and alternative asset classes and/or strategies that provide less correlated returns.
In doing so, there is a much greater chance that corrections in one market can be offset by rallies in another, leading to reduced portfolio volatility and a better backdrop for shortening the recovery. That’s not a guarantee that today’s bear market won’t put a dent in people’s financial plans, but when it comes to limiting the recovery period following a selloff, time really is money.
Mark Stacey is Co-CIO AGFiQ Quantitative Investing and Head of AGFiQ Portfolio Management, AGF Investments Inc. He is regular contributor to AGF Perspectives.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2020 AGF Management Limited. All rights reserved.
Written by
Mark Stacey, MBA, CFA®
Senior Vice-President, Co-CIO AGFiQ Quantitative Investing, Head of Portfolio Management
AGF Investments Inc.
