Tuesday 10 March 2020 12:01 pmSchroders Talk

How stock markets perform after heavy falls

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I am an Investment Specialist at Schroders.

Coronavirus concerns have swept through financial markets. Globally, stocks have endured some of their worst performances since the days of the financial crisis.

For instance, the US stock market, as measured by the S&P 500, fell 7.6% in one day on 9 March 2020, its fifth worst trading day since 1988.

On the same day, UK stocks, as measured by the FTSE All-Share Index, fell sharply. It dropped 7.4%.

What next?

It is impossible to predict what may happen next. The severity of the disease and its long-term economic impacts are still yet to be seen.

However, while the stock market has been quick to react, history shows it has a tendency to bounce back strongly over time.

  • Keep up to date with the latest on how coronavirus might impact investments and the economy here.

How the stock market bounces back

Using the US stock market as an example, the past three decades show the strongest five-year rebound in the US brought a return of 164%. That is an annualised return of 21% in the five years after a 6.7% fall for the S&P on 20 November 2008.

That date was during a particularly gloomy phase of the 2008-09 financial crisis.

Given the abject mood at the time, investors may have struggled to believe that an investment of $10,000 made in the market at the start of that turbulent day would have grown to $26,400 within five years, before charges.

Of course, past performance is not guaranteed to be repeated in the future. The returns are illustrative and  do not  include any costs or fees. But the data underlines the historic resilience of shares over longer timeframes, even following shocks.

The US stock market’s ten worst days and their rebounds

A short history of the stock market’s worst days

As the table above shows, the pattern is repeated on many other of the ten worst one-day crashes.

Falls associated with the global financial crisis, including the eurozone debt crisis, account for seven of the ten worst days the US stock market has endured since 1989.

The most severe was a 9.0% fall on 15 October 2008. This was followed by a five-year return of 109%, or an annual equivalent of 15.9%.

The credit crisis escalated into a full-blown financial crisis in 2008 with the collapse of the investment bank Bear Stearns, and worsened with the failure of Lehman Brothers in September of that year. This created a domino-effect among banks and insurers. Forced mergers and government bailouts were required to stabilise markets.

Such crisis moments attract contrarian investors, such as the feted investor Warren Buffett who invested $5 billion in Goldman Sachs in September 2008.

And the worst of the rest

The stock market falls during the post-dotcom 2000 to 2003 slump did not make the top ten. A 5.8% fall on 14 April 2000 was the 12th worst. It was followed by a 7.4% loss five years later.

The data doesn’t stretch back to Black Monday in October 1987 when US stocks fell 22% in a day, their biggest ever one-day fall.

Time in the market

As the chart below shows, the stock market has provided healthy returns, despite the ups and downs over the last three decades and providing you can keep your nerve.

A $1,000 investment in the S&P 500 at the end of 1988, left alone, could now be worth $22,678, not adjusted for charges or inflation. That’s an average annual return of 10.6%.

How a $1,000 investment could have grown since 1988

Past performance is not a guide to future returns. The chart is for illustrative purposes only and does not reflect an actual return on any investment.

The strongest FTSE rebound

Similar data was collated by Schroders for the UK’s FTSE All-Share. The strongest recovery from the ten worst days was a 134% five-year gain following the worst of the banking crisis turbulence in the UK on 2 March 2009.

Again, like the S&P 500, the UK stock market has provided healthy returns, providing you can stomach the ups and downs over the last three decades.

A £1,000 investment in the FTSE All-Share Index at the end of 1988, left alone, could now be worth £14,016, not adjusted for charges or inflation.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. 

Important Information: The views and opinions contained herein are of those named in the article and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The sectors and securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. This communication is marketing material.

This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. Issued by Schroder Investment Management Limited, 1 London Wall Place, London, EC2Y 5AU. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

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