“History doesn’t repeat itself, but it often rhymes.” —Mark Twain
So how does our current situation rhyme with past market challenges? As I write this article, I don’t know what the weeks or months ahead hold for the stock market or the economy, but we can sometimes get clues by looking at the past.
It helps to understand the vocabulary market pundits and economists use. You will hear correction, recession, crash, bear market and economic collapse. These are scary words. It is also important to understand that the stock market is not the economy.
But correction, crash and bear market define events in the stock market. Corrections occur when prices drop 10% to 20%. Other characteristics of a correction from Seekingalpha.com:
◗ Stock market corrections happen often (about once a year).
◗ They tend to happen for no specific reasons.
◗ Market corrections rarely last long (three to four months on average).
◗ They also take another three to four months to recover. So, after a period of six to eight months from the start of the correction period, stocks fully recover.
◗ In most market corrections, there’s a sharp V-shaped recovery.
Corrections become bear markets when stocks tumble 20% or more from their highs. They happen on average every 3-1/2 years and last approximately 10 months. The crash of 1929 is the benchmark for investor fears. The market lost 83.4% of its value over almost three years and took another 25 years to recover. The Great Recession in 2008, still fresh for most investors, lasted 1.3 years, dropped the value of the S&P 50%, and took almost another eight years to recover.
James Royal, in an article for NerdWallet.com, explained a crash as “a sudden and very sharp drop in stock prices, often on a single day or week. Sometimes a market crash foretells a period of economic malaise, such as the 1929 crash, when the market lost 48% in less than two months, kicking off the Great Depression. But that’s not always the case. In October 1987, stocks plunged 23% in a single day, the worst decline ever, before roaring back over the next year. Crashes are rare, but they usually occur after a long-term uptrend in the market.”
A recession is an economic term that refers to a general slowdown in the economy and is usually defined as two consecutive quarters of negative gross domestic product growth. Recessions don’t always trigger a bear market and bear markets do not always lead to a recession. The most recent example is the crash of 1987. The bear market lasted only three months.
At this point, no one knows where the stock market or the economy is going. No one knows the trajectory of the COVID-19 pandemic. It is now looking like we will be heading into a recession.
The recession will not be triggered by the downturn in the stock market. Investors are looking at potential changes in the underlying economy as we respond to the COVID-19 pandemic. The economic shifts started with the supply chain disruption when the virus hit China. It accelerated with the travel bans and business closures. It has been fueled by uncertainty and fear. In general, fear and uncertainty are driving the wild ride on Wall Street.
At some point, the uncertainty will be resolved. The fear will be tougher to dampen.
I know we are a resilient country. The economy will recover. The stock market will recover. There are more safeguards in place than in previous market meltdowns. History has shown that patient investors are rewarded. Diversification is rewarded. Just remember: Buy low and sell high.•
Hahn is a certified financial planner and owner of WWA Planning and Investments in Columbus. She can be reached at 812-379-1120 or [email protected]