Will The Stock Market Recover In 2023? (A Stock Market Recovery Time Chart)
Stock Market Chart: Dow Jones Stock Market Returns Since 1789
Will the stock market recover in 2023?
Stock market crashes are normal and expected.
Although market crashes are normal, they aren't always easy to deal with emotionally. Especially if you are new to investing.
The stock market operates in cycles. And our emotions often get swept up in the recurring ebb and flow of the stock market.
Will the stock market recover? If history is any guide, yes. The stock market will eventually recover.
How long that recovery takes depends on a few different factors…
One thing to keep in mind is this: You haven't officially lost anything until you sell. The biggest mistake many people make during stock market crashes is selling all of their stocks because they think the stock market is ending.
It might not feel like it at the time, but stock market crashes generally bring the best investment opportunities for long-term investors.
(Look back to all of the past recessions for reference).
Recession VS bear markets
The stock market is not the economy. Although stock prices generally follow economic performance, the two are not always in sync. Since 1929, only 15 of the 26 bear markets occurred during an economic recession.
For that reason, let’s define the difference between a recession and a bear market.
What is a recession?
A recession is when business activity declines and the overall economy shrinks. They are a normal part of the overall economic cycle. A technical recession is generally declared after 2 negative quarters of GDP growth. GDP measures the total amount of goods and services sold throughout an economy.
(Note: GDP is how the government calculates how much the economy has grown or shrunk in a given period).
GDP data is released every quarter (every three months). So if there are two consecutive quarters of negative GDP growth, that generally signals a recession. Here’s a quick chart showing GDP growth for the United States over the past 65 years:
(The time periods in gray show when an official recession was declared)
Recessions generally last until two consecutive quarters of positive GDP growth.
What is a bear market?
A bear market is defined as a 20% drop in the stock market from the previous all-time high. A bear market is a period where stock prices are in an overall downtrend.
When did the 2022 bear market start?
In 2022 stocks suffered their worst start of the year in over five decades, with the S&P 500 falling 21% during the first half of 2022.
The S&P 500 officially fell into bear market territory on June 13 after closing more than 20% below its high reached in early January 2022.
How long does it take for stock markets to recover?
The average bear market lasts around 1.3 years, with a cumulative loss of -38%.
The average bull market lasts 6.6 years with a cumulative gain of +339%.
Each stock market crash is different. And the duration of each stock market crash is never the same. Bear markets generally last much shorter than bull markets.
Stocks are known to take the stairs up and the elevator down.
Source: First Trust Portfolio
When does a bear market turn into a bull market?
A bear market turns into a bull market when stocks jump 20% higher from their previous low.
For example, if a stock index hits a low of $100 and then increases 20% over a few months to $120, the bear market would be considered over, and a bull market would be declared.
There have been a total of 26 bear markets since 1929. And each one of those bear markets has eventually turned back to bull markets.
There is no reason not to expect the same to happen with this current bear market we are experiencing. Remember, stock market crashes are normal and expected. Markets operate in cycles.
Final Thoughts: Stock Market Bear Markets
Unless you are a few years away from retirement: Any drop in the stock market should be seen as a gift.
Stock market crashes aren’t as scary to deal with when you invest money you don’t need right away, have an emergency fund, and haven’t overextended your current lifestyle with debt.
Just like bull markets eventually become overly optimistic. Bear markets eventually become excessively pessimistic. But that pessimism creates excellent investment opportunities for long-term investors who continue to buy stocks on sale.
As painful as stock market crashes might feel, they are normal and expected.
The S&P 500 recovered from every stock market crash and reached new all-time highs soon after. It’s rational to assume that this time will be no different.
When in doubt, zoom out!
Want to keep learning? Check out some of my other blog posts:
As Always: Buy things that pay you to own them.
-Josh
Blog Post: #043
