If you are even a casual observer of markets, or the news, you have noticed that the markets are currently under some pressure. This time the pressure is associated with uncertain administration and Federal Reserve policy. But it really doesn’t matter the source or catalyst of the decline. I often say that the market is down because of “fill in the blank” reason(s).

A stock chart for the last few months is not very encouraging, but if you expand the time frame, market moves that cause consternation today are merely potholes in the road.

Some History

Let’s keep it relatively recent and look at how many 10% (the minimum loss needed for a textbook correction) losing periods there have been since 1980.

Since 1980, the S&P 500 has experienced 27 drawdowns of at least 10% from peak to trough. These significant market pullbacks have been a recurring feature of the stock market over the past several decades.

It's important to note that not all these drawdowns resulted in prolonged bear markets. Two key statistics about these 10% or greater drawdowns are:

• Only 23.81% of the drawdowns reached a 20% decline or more, this is considered bear market territory
• The average intra-year drop was 14% over the 42-year period

This data suggests that while 10% drawdowns are relatively common, they don't always lead to more severe market corrections. The market has shown resilience, with many of these pullbacks recovering relatively quickly.

Some notable periods of significant market decline since 1980 include:

• The 1987 Black Monday crash
• The dot-com bubble burst in 2000-2002
• The 2008 Global Financial Crisis
• The 2020 COVID-19 market crash
• The 2022 general market decline

Each of these events contributed to the count of 10% or greater drawdowns, but they varied significantly in their depth and duration. Consider this excellent chart from JP Morgan that illustrates this. Keep in mind the chart only shows closing values.

To clarify, the black bars show the final calendar year returns while the red dots and percentages show the intra-year performance declines.

Just because there is a 10% downturn in the market does not mean the market will crash. In many cases, the market closed up for the year even with a 10% or larger downturn.

The Road to Recovery Has Many Lanes

The length of stock market recoveries depends on multiple interrelated factors, many lanes, with historical data showing recovery periods ranging from months to decades. Key influences include:

Depth of Decline

• Mathematical hurdles: A 20% decline requires 25% growth to recover, while a 50% drop needs 100% growth. This asymmetry significantly extends recovery time for deeper corrections.
• Severity Tiers: Corrections (10-20%) have an average eight-month recovery
• Bear Markets: (20%+) have a median recovery of less than three years, but historically range from eight months (COVID-19) to 25 years (the 1929 crash, the worst of the worst)

• Underlying economic health: Strong GDP growth and corporate earnings accelerate recoveries, as seen in the 2020 COVID-19 rebound which was the fastest on record

Policy Responses

• Monetary interventions (Federal Reserve rate cuts) shortened the 2020 crisis recovery
• Fiscal stimulus: packages helped stabilize markets during 2008-2009 and 2020 downturns

Market Psychology

• Investor sentiment shifts: Panic selling can deepen declines, while sustained buying accelerates recoveries
• Institutional behavior: Program trading and algorithmic responses may amplify volatility in both directions

External Shocks

Geopolitical events and black swan occurrences create varied recovery timelines:

• Quick recovery: 2020 pandemic due to coordinated global response
• Extended recovery: 2008 financial crisis (6 years) due to systemic banking failures

Historical patterns show markets eventually recover all declines given sufficient time, but recovery speed depends on this combination of technical, economic, and behavioral factors. Investors maintaining diversified portfolios and long-term perspectives typically weather these cycles most effectively. Consider this graphic of bull markets vs. bear markets. It isn’t fully up to date, but the point is to pay attention to the duration of each.

The key take away is bull markets are far longer and more productive than bear markets.

Not All Sectors Recover at the Same Rate

Different sectors recover from market crashes at varying speeds, influenced by their cyclical or defensive nature, economic conditions, and the specific causes of the decline. Here's an overview of how major sectors typically fare during recovery periods:

Sectors That Recover Quickly

1. Healthcare
   • Healthcare is considered a defensive sector due to its inelastic demand—people require medical care regardless of economic conditions.
   • Companies with strong cash flow and low debt tend to recover faster. For example, during the 2020 COVID-19 crash, healthcare companies like Regeneron Pharmaceuticals thrived due to their role in combating the pandemic.
2. Consumer Staples
   • This sector includes essential goods like food, beverages, and household items, which maintain steady demand even during downturns.
   • Companies like Clorox and Kroger performed well during the COVID-19 crash and recovered quickly due to their role in meeting basic needs.
3. Utilities
   • Utilities are another defensive sector because consumers continue to pay for electricity, water, and heating regardless of economic conditions.
   • These companies tend to recover steadily but may not experience rapid growth post-decline.
4. Information Technology
   • While IT is generally cyclical, certain segments (cybersecurity, remote work software) can recover or even thrive during specific crises.
   • For example, companies like NVIDIA and Citrix saw rapid recovery during the 2020 crash due to increased demand for gaming, crypto mining, and remote work solutions

Industries with Slower Recovery

1. Real Estate
   • Real estate is highly cyclical and often recovers more slowly due to its dependence on interest rates and economic stability.
   • However, specific segments like data center REITs or telecommunication tower REITs may recover faster if tied to emerging trends (5G rollout).
2. Financials
   • The financial sector often suffers prolonged recovery times after declines caused by credit or banking crises (2008 Global Financial Crisis).
   • Recovery depends on regulatory changes, interest rates, and consumer confidence.
3. Energy
   • Energy companies are highly sensitive to global demand fluctuations and commodity prices.
   • Recovery can be slow if a decline leads to prolonged lower oil prices or shifts in energy consumption patterns.
4. Industrials
   • This sector relies on economic growth and capital investment, making its recovery tied to broader economic rebounds.
   • Recovery is slower if a decline results in reduced infrastructure spending or global trade disruptions.

It's important to note that each market downturn is unique, and recovery times can vary significantly based on the interplay of these factors. Historical data shows that markets have always recovered over time, but the duration can range from months to years depending on the specific circumstances.

S&P 500 Sectors Across the Business Cycle

This infographic illustrates sector performance across the full business cycle, which is not the same as over a market decline, per se. It is nonetheless interesting.

The AI answer to market volatility:

 

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