Equity Market Downturns and Recoveries

Downturns and Recoveries

Investors in shares must expect market shocks as part of the long-term benefits of owning part of a company, and on average over time, stock markets fall one year in every five. History provides a valuable guide to how markets normally recover from shocks, showing the missed opportunities of exiting equities and not re-entering.

Stock market contractions and expansions

The stock market moves in cycles with periods of contraction followed by periods of expansion. There have been eight market downturns in the past 47 years.

A contraction is defined by a period when the stock market value declined from its peak by 10 per cent or more. These declines seem to happen at random and last for varying time periods.

Expansion measures the recovery of the index from the bottom of a contraction to its previous peak and the subsequent performance of the index until it reaches the next peak level before another 10 per cent decline.

The last contraction (associated with trade war with China and rising interest rates) began in October 2018 and ended in December 2018. The stock market recovered from this crisis in April 2019.

While some periods of decline have been severe, the market, overall, has grown with time. For instance, the stock market fell by 14.7 per cent from its peak at month-end May 1990 to its trough in October 1990 but grew by 355.1 per cent from November 1990 to its next peak in June 1998.

No one can predict market declines with certainty. Investors should have a long-term investment horizon to allow their investment to grow over time. Returns and principal invested in stocks are not guaranteed.

Read the full Morningstar Research paper on Equity Market Downturns and Recoveries here