What Happens After the Worst Years for the Stock Market?

2022 has been a very rough year for the stock market. The S&P 500 closed at an all-time high on the first trading day of the year (January 3). It’s been nothing but bad ever since. The S&P has experienced an 18.6% drawdown in the months since.

Historical Market Trends

If you look at the historic data for the stock market dating back to 1928 (just before the Great Depression), you will see some great years and some terrible years. The market has always had its extremes. We all know that. Playing the stock market comes with risks and rewards. The trick is to mitigate those risks as much as possible and take advantage of the rewards. Studying and understand historic trends is one way to navigate the market.

As of now, 2022 is tracking to be one of the worst years in stock market history. There is a chance for some recovery before year’s end, but we can’t count on it. So, the big question is what tends to happen in years following these bad markets? How can you alter your financial plan to survive this down period and be in position to thrive when the market inevitably turns around again?

Since 1928, there have been 11 years where the S&P experienced double-digit losses. The worst in history was 1931 with a 43.8% loss. 2008 wasn’t far behind at 36.6%. Other significant loss periods happened during WWII and the dot-com crash of the early 2000s. If 2022 ended today, it would be the 7th worst calendar year since the Great Depression.

The Years to Follow

The good news is the following years after market crashes saw positive signs. If you take those worst 11 years mentioned above, the next year saw modest average returns of 6.4%. There were a few that had losses and a few with big gains, so the trend is a little less predictable. However, within 3-5 years is when major returns happened in almost every instance. The average three-year gain was 35%. The average five-year gain was nearly 80%. 

Having the Right Investment Plan

We don’t know exactly what will happen in the second half of 2022. Inflation has been a beast, Covid is still a threat to normal daily life and plenty of other economic factors are in play. This will likely be a down year for the stock market when all is said and done. The important thing to remember is it’s not the end of the world. The market will ultimately recover and, if history has anything to say about it, it could recover very strongly over the next few years. Smart investors will know how to hedge their investments now and then leverage them for the recovery years to come.

This is why it is important to have a diverse portfolio within the stock market and outside of stocks and bonds. Diversification can allow you to do well over the long term despite any extreme ups and downs in the market.

To discuss your financial plan and investment strategy for the rest of 2022 and beyond, contact Illumination Wealth today.