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Investing Through Recessions and Recoveries: Lessons from History

By Craig Fehr August 13, 2020

The bear market decline earlier this year was unique in its catalyst (global pandemic) and speed (fastest 30% drop on record), but bear markets themselves are not abnormal. And the good news for investors is that every prior bear market in history has been followed by a recovery and new bull market – a streak we do not expect to be broken this time.

Market downturns are never pleasant, and while it's nearly impossible to avoid them, past experiences show they don't have to derail your journey toward your financial goals. Here are three lessons from history that can serve as a valuable guide:*

  1. Market declines have been temporary. Staying invested can help you keep them that way.
    • While it would be ideal to avoid market declines altogether, the reality is they can't be predicted or timed with exact precision. Trying to do so means you'll inevitably miss the upside in hopes of avoiding the downside. Moreover, trying to time the market means you must consistently predict both the top and the bottom, increasing your chances of mistiming.
    • By selling your investments after they've declined, in hopes of avoiding further downside, you're raising the possibility of turning short-term declines into real losses in your portfolio. Even the best investments won't be immune to declines, but staying invested gives you a better opportunity to participate in their rebound, helping keep temporary declines just that – temporary.
    • Bear markets often include strong rallies that emerge without warning. Looking back to 1970, bear markets have, on average, contained more than two separate 10% rallies, with the largest averaging a gain of 17%. And, importantly, bear markets often turn into bull markets quickly, with sizable gains occurring early in the recovery. In the last five bear market recoveries, the S&P 500 rose by an average of 25% in the first three months of the new bull market.* This year, in the three months following the March 23 low, the stock market delivered a return of more than 30%.
  2. The stock market's lows don't have to be your lows.
    • We believe diversification is a critical element of a long-term investment strategy. In particular, a proper allocation to fixed-income investments can serve as a ballast for your portfolio when stocks decline.**
    • From Feb. 19 to March 23 of this year, the S&P 500 declined 35% as the spreading pandemic sent the U.S. and global economies into recession. Portfolios that were diversified with fixed-income investments benefited as bonds were up 3% on the year through March. This is consistent with history, as bonds typically perform much better during stock market sell-offs. During the bear markets over the past 40 years, the average stock market decline was -42%. Bonds averaged a return of +8% during those periods.*
    • While the stock market was down 35% during the February through March selloff, a portfolio of 65% equity/35% bonds was down noticeably less (25%). Building and maintaining a mix between equity and fixed income that is aligned with both your desired long-term return as well as your comfort with risk can, in our view, help your portfolio travel a smoother path toward your goals over the long term.**
  3. Bull markets last longer than bears, meaning time is on your side.
    • Recessions and accompanying bear markets are painful, but history shows they are shorter than you may think, and, importantly, they have been outweighed in duration and magnitude by their bull market counterparts. Thus, even sharp declines such as those this year and in 2008-09 don't have to derail your strategy.
    • Since 1950, average bear market declines in stocks lasted 18 months, while the average bull market expansion lasted an average of 54 months, with an average total return of 152%. This shows that bulls have lasted three times as long as bears. Moreover, following the bear markets ending in '82, '87, '02 and '09, the stock market returned to a new high in an average of 32 months. A 65% equity/35% bond portfolio recovered in 11 months,* reinforcing the value of diversification and a long-term approach. **
    • There is no "all clear" signal that announces the end of a bear market and the beginning of a new expansion. In fact, bull markets often begin when conditions appear most challenging. This highlights the importance of staying invested and making disciplined, appropriate adjustments throughout the downturns to help put you in a position to best participate in the upside as the transition to a new bull market occurs.

Source: Morningstar Direct, S&P 500 Index, Ibbotson Large Cap Stocks TR index, Bond Fund of America F1, Bloomberg Barclays US Agg Index, Edward Jones calculations. The 65/35 portfolio consisted of 35% American Bond Fund and 65% Ibbotson Large Cap Stocks TR Index from 1975 – 1980. From 1980 onwards, 35% bonds are represented by the Bloomberg Barclays US Agg 1/1/1975 - 5/31/2020.

Past performance is not a guarantee of what will happen in the future. Indexes are unmanaged and not available for direct investment. Performance does not include the payment of any expenses, fees or sales charges, which would lower results.

Talk with your Edward Jones financial advisor to review your financial goals and about opportunities to keep your portfolio aligned with those goals in the future.

Important Information:

*Past performance cannot guarantee what will happen in the future.

**Diversification cannot ensure a profit or protect against loss in a declining market.

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates, and investors can lose some or all of their principal.

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