Has the stock market historically outperformed following equity bear markets?

As addressed in our accompanying piece, equity markets have generally delivered positive returns to investors more than three quarters of the time over periods longer than one year. That probability is even stronger when starting from a point like today when the market is down more than 20% from its recent peak.

How strong have these returns historically been? As shown in the chart above, in the post-World War II era, average returns on the S&P 500 have exceeded the long-term average returns for the index over the one- and two-year periods following a decline of 20% or more. In the two years following the onset of a bear market, the S&P 500 has, on average, outpaced the average two-year return by about five percentage points.

It’s important to note that the returns presented above shouldn’t be viewed as a forecast of future returns. Even the 12% average annualized return for the S&P 500 since 1946 appears high by recent standards. Structural factors (demographics, labor force growth, and capital market factors) paint a different picture today; expected returns for the next decade are below that average. The important point is not the level of returns, but that the relative performance of stocks has tended to be stronger coming out of downturns.

Of course, each period is subject to its own unique circumstances. Historical averages are an imperfect predictor of the future but can be effective in providing some context and perspective. Nevertheless, our analysis of prior cycles confirms that bear markets tend to provide relatively attractive entry points to invest in stocks viewed through the lens of a multiyear investment time horizon. Patience has typically been rewarded.