How optimistic is it that the S&P 500 SPX is close to recovering from its 2022 bearish market losses? The benchmark US stock index with reinvested dividends (total return) is only 2.0% below its January 2022 all-time high. Even a moderately good week in the stock market can propel this benchmark to the top.
If it happens soon enough, the recovery from the 2022 bear market will be one of the fastest in history. The S&P 500’s bearish market decline last October 12 has been less than 10 months.
unfortunately…
How optimistic is it that the S&P 500 SPX is close to recovering from its 2022 bearish market losses? The benchmark US stock index with reinvested dividends (total return) is only 2.0% below its January 2022 all-time high. Even a moderately good week in the stock market can propel this benchmark to the top.
If it happens soon enough, the recovery from the 2022 bear market will be one of the fastest in history. The S&P 500’s bearish market decline last October 12 has been less than 10 months.
Unfortunately for the bulls, the future of the market cannot be judged based on the speed of this correction. A quick correction does not necessarily indicate a better stock market performance than a long-lasting correction.
To reach this conclusion, I analyzed all bear markets since 1900 in a calendar maintained by Ned Davis Research. In each case, I calculated how long it took the US stock market to recover from the level it was at when the downturn began. I then measured the correlations between the timing of that recovery and the stock market performance over one, two and three years following that recovery.
None met the conventional standards for statistical significance. Sometimes, as was the case after the February-March 2020 bear market, a quick recovery time (in that case just five months) is followed by a strong market performance. But even after four years of recovery from the global financial crisis of 2007-2009, the market did very well.
Given the efficiency of the stock market, we should expect this result. One hallmark of that efficiency is that the market is far-sighted. How it performs in the coming months depends on whether the news turns out to be better or worse than currently expected – not how the stock market performed before now.
Imagine for a moment that a quicker recovery time increased your chances of a later strong performance. In that case, traders will rush to buy the stock, and in doing so bid up the price until the expected future return of the market is better than the average.
Bottom-line? We can all celebrate the recent strength of the stock market. But celebration is not an investment strategy. Our job as investors will come back to what it always is: to analyze whether the news is coming out better or worse than expected.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a fixed fee for audits. can be reached [email protected]
