By The recent performance of the S&P 500 speaks volumes about the current state of the market. After enduring a bear market in 2022, the benchmark U.S. stock index, with dividends reinvested, is now a mere 2.0% away from reclaiming its all-time high in January of that same year. With just a modestly good week, this index could once again find itself at the pinnacle of success.
If such a feat is accomplished in the near future, it would mark one of the fastest recoveries from a bear market in history. The previous low point for the S&P 500 was reached less than 10 months ago on October 12th.
However, it is important not to place too much emphasis solely on the speed of this recovery when evaluating the market’s future. Quick rebounds do not necessarily guarantee superior performance in the stock market compared to longer recoveries.
To arrive at this conclusion, an analysis was conducted on bear markets dating back to 1900, utilizing the calendar maintained by Ned Davis Research. Each instance was meticulously examined to determine how long it took for the U.S. stock market to surpass the level at which it stood at the beginning of that particular bear market. Subsequently, correlations were measured between the duration of these recoveries and the stock market’s performance over one, two, and three years following said recovery.
The Stock Market: Debunking Traditional Standards
None of the recent market recoveries satisfied the traditional standards of statistical significance. Take, for example, the quick rebound after the February-March 2020 bear market – a mere five months of recovery time resulted in strong subsequent market performance.
But this is not an isolated incident. The market has shown exceptional performance even after the grueling four-year recovery from the 2007-2009 Global Financial Crisis.
These results should not come as a surprise, given the stock market’s efficiency. One of the key attributes of this efficiency is its forward-looking nature. The market’s future performance hinges on whether the news will exceed or fall short of current expectations, rather than dwelling on past market performance.
Now, let’s suspend reality and imagine a scenario where a quick recovery time actually increased the odds of strong subsequent performance. In such a world, traders would inundate the market with stock purchases, leading to inflated prices and ultimately bringing the market’s expected future return back to average levels.
So, what’s the bottom line here? It’s great to celebrate the stock market’s recent strength, but let’s not mistake celebration for an investment strategy. As investors, our primary role is to analyze whether the incoming news is better or worse than expected, driving our investment decisions.
Remember, the stock market is a complex ecosystem that demands careful evaluation and a nuanced approach.
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