Previous Capital Market Drawdowns Provide Insight to Our Road Back 
In just 22 trading days from February 19 th through March 23 rd , the S&P 500 shed 34%, marking the swiftest sell-off of this magnitude in stock market history according to Bank of America Securities data. [1] This downturn was precipitated by the onset of the COVID-19 outbreak with current confirmed global cases, as of this writing, at over 400,000. [2] During this sell-off, investors have been dumping equities as fear of economic fallout from the Coronavirus has thus far outpaced efforts from global central banks and governments to flatten out the outbreak curve and soften the near-term economic impact to the global economy. While this drawdown is unique in its origins, it has reminded investors of previous market sell-offs experienced during the 2008 Great Recession and early 2000 Dot Com bust.

Mark Twain once quipped, “History doesn’t repeat itself but it often rhymes.” In this note, we explore observations from experiencing previous market sell-offs including:

  • How long did it take investors to recover looking at the past (2) capital drawdown periods
  • Positive long-term impact of rebalancing in the midst of sharp market pullbacks
  • Capital markets begin their recovery before economic data or sentiment improves

How long did it take to recoup previous losses? While we acknowledge the Coronavirus and its unprecedented level of societal fear and anxiety, we as investors have encountered economic uncertainty and sharp market sell-offs before; ultimately, more than recovering in the long run. We reviewed market data from the 2008 and 2000 market pullbacks, respectively, analyzing the investor’s time to recovery. 

For illustration purposes, we created a simple balanced investor with 50% of their investment portfolio invested in the Barclays Aggregate Total Return Bond Index (total return includes monthly interest in the performance figures) and 50% in the S&P 500 Total Return Index (total return includes dividends in performance figures) with a $1M portfolio at previous market peaks. We then quantified our balanced investor’s drawdown and subsequent recovery to the $1M portfolio value.

As you can see in the chart, our balanced investor during the 2008 Financial Crisis had to withstand a 24% pullback (relative to the current drawdown of 17% as of March 23, 2020) from October 2007 through March 2009, but then made a full recovery back to their $1M portfolio from March 2009 to September 2010. Peak to trough back to peak took our balanced investor roughly 3 years to fully recover from the 2008 Great Financial Crisis (assuming they did no rebalancing throughout the pullback and market recovery).

This investor had a similar experience during the Dot Com Bubble with our balanced investor’s portfolio peaking at $1M in March 2000, experiencing an 9% drawdown through September 2000, and then fully rebounding by June 2003 with a 12% recovery. Peak-trough-peak occurred over a roughly 3-year period again for our balanced investor (again, assuming no rebalancing during this time period).
This balanced investor illustration is not to suggest that we are calling a market bottom, particularly given the level of uncertainty as to how the virus may or may not proceed and its economic impact. However, it does remind us as investors that we have been here before. In fact, at current levels, a balanced investor faced a sharper drawdown in 2008, but at a slower pace than the current 17% pullback as of March 23 rd .

Benefit of Staying Disciplined and Rebalancing Back into Equities We noted the recovery time for a balanced investor during the previous two market sell-offs was roughly 3 years, with the caveat that our investor did not rebalance during the market pullback back toward long-term investment targets (i.e. selling fixed income to buy back into the S&P 500 following its sharp pullback). The market bottoms (obvious in hindsight) occurred on March 9, 2009 and October 9, 2002, respectively, when looking at the S&P 500 Total Return Index. Had our balanced investor been willing to stay disciplined and average back toward their long-term 50% Fixed Income/50% Equity allocation targets, their 3-year recovery would have been closer to 2.5 years based on our analysis.

We view the probability of an investor successfully timing the market bottom exactly right to be very low. However, as you can see when looking at the 5-year forward returns on S&P 500 purchases near market bottoms in 2008 and 2000, respectively, investors could have been a little too early or late relative to the market bottom with their entry points and could have still earned a robust 5-year average return from the S&P 500. 
During the Dot Com bust, investors rebalancing back into the S&P 500 nine months before or after the market bottom on 10/9/2002 earned on average 10.3% over the next 5 years on these rebalance purchases. Similarly in 2008, investors buying back into the S&P 500 twelve months before or after the market bottom on 3/9/2009 yielded on average 14.5% over the next 5 years. 

Why are S&P 500 returns so robust when buying around market bottoms? As you can see in the JP Morgan chart below, when purchasing at more favorable valuation levels (current forward price to earnings of the S&P 500 as of March 20 th is 13.3x) your future expected rate of return improves. In layman’s terms, the less you pay for the S&P 500 the higher your expected future rate of return. 
Markets Recover Before It Feels and Looks Good Our final point is that investors will typically see the market rebound prior to economic data and overall sentiment improving. We went back and reviewed headlines from March 9, 2009, noting such dour headlines on that day as:

  • “For Dow, another 12-year Low. S&P also finishes at lowest level in more than a decade as Wall Street resumes its retreat on economic worries.” CNN Money, March 9, 2009.
  • “Taking a Depression Seriously” – New York Times, March 9, 2009

When reading the above headlines, one likely was not thinking in the moment that this was the bottom of the market during the Great Recession, but in fact it was. To further illustrate our point about markets moving before data improves, we compared the S&P 500 to the unemployment rate in 2008 and 2000, respectively, highlighting the S&P market bottoms and corresponding unemployment rates at the time.

As you can see in the charts below, when markets bottomed in March 2009 and October 2002, respectively, the US unemployment rate continued to increase after the market had already bottomed. This is an illustration of the stock market moving on future expectations and underlying positive data generally lagging the stock market's movement upwards. We highlight this to investors considering on waiting for the obvious market bottom before buying back into markets. As the headlines and data illustrate, market bottoms are not obvious in the moment; they only become apparent the farther we move away from them.
In closing, we recognize in a time of social distancing, expected future lay-offs, and potential economic contraction, these times are unprecedented and likely stressful. But, we encourage investors to take solace in analyzing prior market drawdown periods. The Coronavirus too shall pass and we as a global economy and society will move to the other end of this at some point in the future. We recognize it takes a certain level of mental fortitude and courage to rebalance in the midst of a 30% market drawdown, but using history as a guide, buying around market bottoms better positions investors to more quickly recover once markets begin their recovery.  

Very truly yours,

David C. Brinkman, CPA, CFA, CFP® 

Investment Relationship Manager
Schneider Downs Wealth Management Advisors, LP
Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.

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