Capital Investment Advisors

The Violence Of Economic Recoveries And The 30-For-30 Can Leave Market Timers Behind

A few weekends ago I was shopping for pancake mix at the grocery store with my 10-year-old son, Jake. The day prior, the Standard & Poor’s 500 index had officially hit the negative 20% mark. As I strolled past the newspaper rack, my maple syrup-soaked daydream was abruptly interrupted by the headline in bold, Times New Roman font: “S&P Briefly Dips Into a Bear Market.”
As alarming as that headline was, it was perhaps even more striking to see the newspaper price listed directly above it. Six dollars! That’s right, $6 to buy a newspaper. You know, the kind where the news is printed on actual paper.
To be perfectly honest, I fell prey to the digital revolution years ago, so I hadn’t been keeping a close watch on the price for print, but even so, this felt exorbitant. After all, inflation is culprit No. 1 for the market’s recent swoon.
“That’s inflation for you,’” I said to Jake. “Who would pay $6 for a newspaper?” he asked. I couldn’t help but wonder if the powerful headline was a sign of surge pricing we see in other industries. Most of us have experienced that phenomenon when trying to use Uber or Lyft at rush hour. If the headline had been something less incendiary, such as a market recovery, I doubt the sticker price would have commanded such a premium.
Bear markets are movie stars and get the headlines. But, recovering markets are the reality TV contestants you’ve kind of, sort of heard about. As a reminder, a bear market is when the market declines 20% from a recent high.
Indeed, bear markets really know how to steal the show. First, 20% is a big round number. Second, universal fear commands a broad audience. And third, as simple as it sounds, imagery is powerful. It’s easy to conjure up that visual of a ferocious bear, even if it’s deep within the subconscious.
Recoveries aren’t very dramatic or dynamic. No one joins a gym because they want to slowly and methodically gain muscle over time. They want six-pack abs, and they want them now! The fact that instant fitness is impossible matters very little when it comes to selling gym memberships. It’s the same with market recoveries and headlines. Slow growth, while extremely impactful and beneficial, doesn’t sell newspapers.
Maybe a mascot would help? The market recovery Sloth? No, probably not.
This was all so fascinating that I decided to have our research team open up the history books to examine the nature of stock-market recoveries. How long do they take? What percentage of the recovery happens at the beginning? The middle? The end?
Doing a search for all bear, or near bear, markets in the last 60-plus years pulled up a dozen instances. What we found was that the time it took for prices to get back to their previous peak was an average of 1.7 years. Digging deeper into the data, bear markets associated with recessions recover in an average of 2.5 years, while bear markets without recessions average a 0.7-year recovery.
All good to know, but here’s where it gets even more interesting. The initial momentum of market recoveries tends to move upward violently and are completely unpredictable from a timing perspective. Once a market truly bottoms out, which we can only confirm in retrospect, the gains happen so swiftly that the opportunity to move up with them can easily be missed.
On average, a full 30% of a market’s recovery happens in the first 30 days. In ESPN sports terms, we would call that 30-for-30.
Keep in mind that a fully recovered market, one that has retaken all of the high ground it lost in the downturn, can take a year, two, or even more. Viewed from that lens, 30 days is like the blink of an eye. But, those not actively participating will miss out on a big portion of the recovery.
In other words, what this means for you as an investor is very straightforward and powerful. If you’ve bailed on the market, when it starts to recover, you’re going to miss all the fun. The bulk of the repair happens long before anyone’s talking about it. Remember my grocery store revelation — recoveries don’t make headlines in $6 newspapers.
Luckily, you and I aren’t in the $6 newspaper business. We aren’t looking for the sexy option. We’re looking for the smart option. We’re in the business of making solid investments that allow us to retire sooner and happier than we ever thought we could. We have the confidence of economic security that comes from calmly and patiently making choices that protect our future purchasing power in retirement. For a newspaper, when it bleeds it leads. For happy retirees, when it slows it grows.
You probably know people who let scary markets persuade them into hopping out of the market or moving assets to cash to avoid the pain of a dwindling portfolio. We’ve all considered it, but we resist to avoid the cruelty of a well-established fate — the market choosing to recover unexpectedly. Once that is underway, it can move quickly and leave sellers flat-footed. The train will have left the station, and most people aren’t fast enough to catch it. The twisted trade of short-term relief for long-term regret is a tough racket.
The bottom line is that the way to avoid missing out on these recoveries is participation over perfection. The market won’t always look or feel the way you want it to, but we have to be in it to win it. History shows us that 30 days can be the difference between a significant part of our long-term potential gain. If we miss that 30-for-30, we may never fully recover.
Read the full AJC article here
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