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The recovery is going to be longer than what you expected

It's a fact.

If you think that you are uncomfortable with how arduously long the current drop in the market is taking, you are going to be even more uncomfortable with how long the recovery is going to be.

Just this week, we have seen that the Hang Seng Index is now at a 13-year low. The last time the Hang Seng Index had such a drastic drawdown of more than 30% was during the Global Financial Crisis during the 2008-09 period. During that time, the whole drop took 1 year and 4 months and the recovery period took 3 years and 11 months! In total, anyone who bought at the peak was underwater for 5 years 3 months! If you think this is long, it was worse during 97 Asian Financial Crisis. Back then, the drop only took 1 year and 1 month. However, the recovery period took 7 years and 7 months! So those who bought at the peak during 97 are only out of the reds after almost 9 years.

If you are also invested in technology stocks, you might have seen the news recently highlight that Cathie Wood's ARKK is now at the lowest point in 5 years and have fallen more than the NASDAQ during the dot-com bubble. ARKK is now 78.7% off the highs it made in February 2021- which means the drop (that is still happening now) has already happened for 1 year and 8 months, and we have yet to see it turn its corner.

During the dot-com crash, the drop took 2 years and 6 months. Guess how long the recovery period took? 12 years and 1 month! Hence, the whole underwater period is 14 years and 7 months. Anyone who bought the index at the peak during the dot com crash in 2000 will have to wait till Oct 2014 before he sees any positive returns. Ouch!

If you look at the broader market (S&P 500), the same story repeats itself over and over again.

Below are the top 10 drawdowns which happen for SPY.

In almost all the drawdowns, the recovery time is longer than the period of decline. We are now about 9 months into the current drawdown. Even if the market were to turn around at this very moment, it is very likely that we will not see the market making any new highs in the 1H 2023. And God knows how long the current decline/drop will be.

So what's the purpose of showing all this information? Some might even think that it could be on the borderline of fear-mongering.

Don't get me wrong. I'm not trying to spread fear here. I'm trying to get everyone to be realistic about recovery here. The recovery time for the market usually took longer than the decline period, and hence don't expect to see the market recovering as rapidly as it did during the COVID-19 stress period. Back then, the market was only on a decline for 2-3 months. It's very different from what you are seeing now.

The only thing we could do is to get ourselves prepared for the recovery when it happens. If you bought stocks which you are convinced in or better still, indexes, it is definitely worthwhile to do dollar-cost average during this period to bring down your average buy-in price. This serves two purposes here. Your portfolio recovery time will be much shorter and your portfolio growth in dollars will be more as you have more units than before. Remember, indexes almost always recover and this could be the best time for you to accelerate your retirement plans. I certainly believe this triumphs buying any treasury bonds or T-bills.

The market is always forward-looking and the market might turn the corner anytime when investors see any signs of the market ending its free fall and a positive reversal of economic indicators emerges. Hence, things like inflation report, labour report and CPI etc are going to be key to look at. The most direct indicator will likely be the interest rate hike put forth by the Fed. We do not need to see the interest rate going back to 1-2% before the market recovers. As soon as the market senses that there is no further interest rate hike, you'll be sure that the turn is just round the corner.

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1 Comment

Oct 31, 2022

Excellent research work, thanks for sharing the output. ☺️

This will require immense holding power and to continue to average down.

One has to be realistic, lest will lead into disappointment/emo.

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