When will the stock market bottom and rise again?

An almost daily refrain in the financial media recently is, “When will the stock market bottom and start to rise again?” That’s a good question. The answer is, “Nobody knows!” Warren Buffett, the Oracle of Omaha, bluntly echoed this sentiment when he said, “I know of no way to reliably predict market movements…”

One caveat is found in a 100-year-old risk management process known as Dow Theory. While Dow Theory does not attempt to predict market bottoms, it does say, “One must assume that the current trend continues until you are proven wrong”. The current trend is down.

Getting back to the market bottoms, another good question is: “What happens after the bottom?” While history does not repeat itself, it is all we have for clues about what may happen after we reach the bottom

The S&P 500 hit an all-time high of 1,539 on March 22 of 2000. It then dropped approximately 49% to 769 on October 10, 2002. Next, the market rallied to 1,576, in October of 2007. This is roughly back to the highs of March 22, 2000.

From the high of March 2000, it took 7+ years to reach the old high again. However, since we’re speaking of what happens after a bottom, from the lows in 2002, it took five years to make the losses back.

We’ve established that the market hit a high in March 2000, lost 49% and then rallied back to the March 2000 highs. What happened next? We then encountered the global financial crisis and the S&P 500 dropped from the high of 1,576 to 667 in about 18 months. That’s a loss of roughly 57%.

After the S&P 500 bottomed in March of 2009, it did not reach new all-time highs again until April of 2013. It took four years to regain the losses from the lows and the round trip from the high in 2007 to the new all-time high in 2013 took approximately 6 years.

To be clear, we are not in the business of predicting the stock market, though we may look to the past for reference because, as Mark Twain said, “History doesn’t repeat itself, but it sure does rhyme.”

Many people are expecting a “V” shaped rebound in the market like the crash during the Covid lockdowns. While this is always possible, prior bear markets have taken years to recover losses. Making bear market losses back in months is rare.

This surprises many people. I’ve heard comments like, “We were just at highs 6-7 months ago. Now we may have to wait 4-5 years to make the losses back? How is that possible?”

There’s an old saying on Wall Street: “The stock market takes the elevator down and the stairs up”. In other words, it goes down quickly and up slowly. Hence, on average, bull markets to last around 4 years while bear markets tend to be quick.** This is due to human emotions and biases like loss aversion. Our brains are hardwired to seek shelter when we’re fearful. People are quick to hit the exits when the market starts going down yet they come back slowly.

To wrap this up, you need to know that the all-time high in the S&P 500 is 4,818.62. With that knowledge, we will leave you with some “If/then” statements about the market’s recover time.

IF the market bottomed at the recent lows and we assume the following compounding rates, then we can give you the amount of time it would take for the S&P 500 to reach the old high.

IF we have a 5% annualized return, THEN it would take 5 years for the S&P 500 to make a new high around 4,800.
IF we have a 7.5% annualized return, THEN it would take 4 years to reclaim 4,800.
IF the S&P 500 goes right back to the long-term return of roughly 10% per year, THEN it would take 3 years to get back to 4,800.
If the stock market has not bottomed yet, THEN we are right back to where we started this blog. “When will the stock market bottom?”

Of course, there’s always the chance of a “V” shaped recovery like we had in 2020, where the losses are made back in less than one year. While this is certainly possible, a lot of things need to happen and the “stars need to align” for us to experience a quick move back to the old highs. Time will tell.

Investopedia states that, from 1926 through December 31, 2021, the stock market, as measured by the S&P 500 Index, has earned 10.49% per year. Some years are better and some years are worse but that is the average.

https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp#:~:text=Key%20Takeaways,its%201957%20inception%20through%202021.

**https://www.investopedia.com/a-history-of-bear-markets-4582652

https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp#:~:text=Key%20Takeaways,its%201957%20inception%20through%202021.

**https://www.investopedia.com/a-history-of-bear-markets-4582652