How do markets react to pullbacks?

​There are a lot of uncertainties we are dealing with right now (just like every bear market)
 
Everyone is wondering:
 
“How much longer will this last?”
“How long will it take to break even?”
“How much worse will this get before it gets better?”
 
 
As of last Friday (September 30th) The S&P 500 was down -25%.
 
As Ben Carlson points out, this was the 9th time since 1950 that the S&P 500 has been down -25% or worse in a bear market.
 
Of these times, many of them have been severe and unprecedented
 
-COVID 19 Pandemic
-Great Financial Crisis
-Dotcom Bubble
-Recission of 1982
 
 
In all of these instances the SP 500 did continue to fall further.
But what were the returns like every time after we’ve experienced a -25% dip?
 
These are the forward one, three, five and ten year returns from down -25% over the past 70+ years in the S&P 500:
​

​​-The average 1 year returns have been over 20%.
-The average 3 year returns over 40%,
-The average 5 year over 80 and average 10 year over 200%.
 
These returns are exceptionally good.
 
There was only one down period over 12 months after a -25% pullback.
 
Now could stocks fall another 15%? Yes of course. But do you really think that stocks won’t be higher in another year or 3 years later?
 
If you don’t believe that… you probably shouldn’t be investing in equities in the first place.
 
 
 
RETURN TO ALL TIME HIGHS (THE “LOST YEARS”)
 
 
The market peaked earlier this year in January and obviously there’s no telling when we will get back to those highs.
 
Everyone is so concerned that this could be the time where it takes years down the road to get back to these all- time highs.
 
Okay… so lets say that is the case.
Lets just hypothetically say we don’t get back to these highs within the next year or two..
 
What does that mean for the market returns if  the next market high is prolonged multiple years?
 
 
-If it takes us 4 years- it would mean we would experience a 9.4% compounded annual return
-If we do it in 3 years- it would be 12%
-5 years….8% compounded..
 
While it feels like we would only be clawing back to get where we once already were… it means that along the way, we would be experiencing good equity returns.
 
We have to have a forward looking view. And what this shows us is that even though these times feel terrible and there’s a chance it could continue to get worse, we’ve actually already experienced a bulk of (if not the majority) of the hit.
 
It would be nice if we did have a crystal ball and could time exactly when to get in and out of the market. That’s shown not to be case, as no one is able to do it consistently over time.
 
What we do know though, is that after pullbacks like this, stocks have higher expected returns and tend to outperform their average.
 
It is important to stay the course and understand how the money you have invested ties into your overall financial plan.