As we hear every day, the economy is in a recession. Unemployment rates are rising, stocks are rising and falling on a daily basis, and it’s hard to tell just when the markets will hit bottom. So how do we move on as investors into 2009 and beyond?
The good news is, once the markets hit bottom, they have to go back up. And history tells us they tend to have a pronounced bounce off of this bottom.
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A look back Out of 83 years of the market’s existence, 59 of those years were what investors would call “good.” The average return for the S&P 500 during those years was 21.9 percent. So, of course, that means there were some bad years as well – about 24 of those years yielded poor returns, resulting in an average drop of 13.6 percent.
The interesting part is this: After the markets hit the trough (or rock bottom), not only do they bounce back, but they bounce back at an extremely rapid rate. Studies of the nine bear markets since 1946 (bear market is defined as the S&P 500 being off at least 20 percent) show that the first three months of a bounce-back yield returns on average of 11 percent, and 32 percent in the first year.
So this is good news, right? It is if your money is in the market when the rates start bouncing back. Missing out on the extreme returns those three months to one year yield can make a lot of difference to your long-term investment portfolio returns.
The bad news is that we usually don’t know we’ve hit the trough until two or three months afterward. That’s the problem with looking backward — you see the event after it happens.
Where do we go from here?
Although we don’t know if we’ve hit the trough, we have compiled studies from major financial institutions to make a general prediction of the recovery of today’s bear market. Our studies show that once we hit the trough, a recovery of two to four years should be expected given the level of the pullback.
Potential for stocks
over the next 10 years As we look forward, low stock prices do provide an optimistic outlook. In fact, the current price to earnings ratios suggest the cheapest prices since the Great Depression. Right now, the P/E Ratio for the S&P 500 is hovering around 10.0 while long term we’ve seen an average of 17.6. Historically, when we’ve seen these lower levels of P/Es, it equates to impending higher returns. One recent historical study of P/E levels suggests that looking two years forward of current P/E levels could easily give us double digit returns in that time period.
Weathering the storm
Staying in the market, even though it may not yet have hit bottom, guarantees your money will be there when the market makes what might be a historically rapid return. It will take time, but the market will even out again and we will see the returns we saw in the good years of the past.
