A Market Checkup: Clear Bill of Health

The market endured a sharp 19% decline from peak to trough, only to stage a swift V-shaped recovery, rebounding 25% to reach a new all-time high on June 30th. Sitting here, we asked ourselves what history teaches us about future return prospects.  In the post-war period, previous sharp rallies off dramatic declines saw continued gains in the next year 100% of the time.  Stocks rose 28% on average after a 20% rebound.  It’s a small dataset (13 instances) so take it with a grain of salt, but reassuring nonetheless... More details are below.

We analyzed 13 distinct bear markets from the post-WWII period through 2022 and focused on the 11 instances in which the market rebounded more than 20% within six months off its trough (a sharp rally like today). Using the dates of these 20% rebounds as starting points, we examined the forward returns. Over 1 year, the market was up 100% of the time with an average return of 28%. Over 3 years, the market was up 100% of the time with an average annualized return of 13%. Over 5 years, the market was up 91% of the time with an average annualized return of 13%. Over 10 years, the market was up 90% of the time with an average annualized return of 11%.  The Tech Bubble (1998 datapoint) was the only period with comparably high market valuations.  It continued higher for a couple years before peaking.