What does history tell us about the probability of positive stock market returns following bear markets?
Equity markets recently fell back into bear market territory, slipping more than 20% below the S&P 500’s January peak. What could that mean for the stock market over the next few years? History may provide some perspective.
Since World War II, the S&P 500 has posted positive returns in about 70% of all calendar quarters. The probability of positive returns for the index increases over longer periods, rising to about 80% of the time for one-year rolling periods and 90% for three-year rolling periods.
But what happens following the onset of a bear market? As shown in the chart above, following a decline of 20% or more, stocks have historically demonstrated an even higher probability of positive returns, particularly when the time horizon extends out to two years and beyond.
Of course, investment time horizon is a critical consideration when setting one’s investment policy. Investors with a short time horizon for the invested funds are more likely to minimize their stock exposure given the inherent volatility of the asset class. Regardless of the historical probability, positive stock returns over shorter periods are far from guaranteed.
Recognizing the uncertainty that persists today, investors should be prepared for the potential for recent market volatility to continue as geopolitical and economic risks are sorted out. But for long-term investors with the ability to tolerate that volatility, history suggests that bear markets create buying opportunities, with a high probability of positive returns over the next few years. Stay invested.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.