While stocks have had a strong year from a calendar perspective (i.e. since January), the market as a whole had been stuck in the red compared to the previous highs set back in October. That is until this past Wednesday, July 3 when "the market", as measured by the Dow Jones, set a new high.
The Dow was the last index to see a new high, as the S&P 500 and Nasdaq had already both cleared that hurdle. While the Dow represents a smaller basket of companies, analysis using it compared to, say, the S&P 500 yields similar results due to the high correlation. Additionally, the Dow has a long history to make for some interesting long-term market comparisons.
Now that the wait for a new record has come to an end, it can be put into historical context using the long history of Dow. While it's obvious that a new market high not an every-day occurrence, what is surprising is the length of the most recent market downturn. Whether investors want to attribute the cool off to trade wars, inverting yield curves, competition from a rising China, or some other narrative, the length of time since the market has set a new all-time high has been unusually long.
The stock market recovery period, measured as the number of trading sessions between all-time highs, was the 21st longest wait in the last 118 years!
Unlike the downturn from January to September 2018 (#24 on the list), which didn't see a sizeable loss compared to other market downturns, the recent downturn had a significant drop of -18.8%, which is the 15th worst on the list!
While the recent downturn was the 21st longest, it also came right after another long drought (#24). There were only nine trading days in between the end of the January 26, 2018 to September 20, 2018 market downturn and the October 3, 2018 to Jul 3, 2019 dip. If one were to think of these market downturns as a single event, it would end up in 12th place on the list!
As the typical year contains about 252 trading days, the table shows that the Dow Jones took over a year to set a new all-time high in only sixteen instances. So, the recent market weakness is quite unusual from a historical perspective.
At the same time, while unusual, the market has not been exactly smooth sailing despite the great returns. The two major market crashes freshest in the mind of today's investors are fairly high on the list. The tech bubble sits in fourth place, while the 2008 financial crisis (though much more severe) sits in seventh place on the list. The loss of 53.8% in the 2008 crisis is only superseded by the Great Depression, at the top in severity and duration.
Since the financial crisis (see #7), there has only been one other downturn that has taken longer to recover, in 2015-2016 (see #15). That downturn saw a loss of 14.5% and, relatively speaking, was fairly similar to recent behavior even including a double dip pattern.
Ultimately, with a maximum loss of -18.8%, this wasn't a market "crash" in comparison to events in the top ten. The market didn't hit the -20% loss commonly used as a "bear market" indicator. However, it easily cleared the -10% threshold used for a market "correction." In the grand scheme of things, there was a brief sharp drop and a lot of sideways movement, continuing trends seen since the end of January 2018.
Given the length of time to set a new all-time high, one might have expected to see a slightly smaller maximum loss. However, the relationship between loss and recovery length is fairly weak. Remember, this is not some exact science!
In the broader scheme of things, the post financial crisis bull market is alive and well. The chart below visualizes the market's health from a downside perspective and, despite the recent setback, the post-crisis run has been one of the most consistent performers behind the bull market of the 1990s.
While the 2008 crisis is the second worst loss on record, it is completely dwarfed by the 1929 crash and subsequent depression. In comparison, the current market movement is barely of note...so far. Since some investors use a 20% drop as defining a "bear market", the dotted line shows that the market losses since the crisis hadn't come very close to hitting that psychological barrier until the most recent downturn.
The chart also provides some insight on market bull runs such as the 1990's or since the end of the financial crisis. Neither those periods of market gains nor any other period came without its share of bumps along the way.
Of course, while history may be helpful to contextualize past events, it provides no guarantee of future events.
The recent all-time high could be the beginning of a new run up, similar to the recent 2015-2016 downturn. On the other hand, the market has not seen a "true" bear since the financial crisis. But, the financial crisis was quite severe and it would be unusual to see a loss event as severe as that so soon. Buuuuuuut, on the other other hand, market valuations are high by many historical standards.
What's the answer? No one knows! History can provide a few templates or scenarios as a basis for potential future events but the future will always have clever new ways to surprise investors.
At the end of the day, whether a downturn comes relatively slowly like the tech bubble or quickly like the recent crisis, investors are rarely prepared for a major loss. Respect the adage to not invest more than one can afford to lose. It's unlikely to be more than a year between new highs but, if it is, having a rainy-day fund so that investments don't have to be pulled at a loss is always a good idea. Beyond that, one can just hope that we won't have to wait 25 years to see a new high like investors did after the Great Depression.
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