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Here’s How Long It REALLY Takes to Recover From Stock Market Crashes

Jeff Clark, Senior Analyst, 
APR 13, 2020

Now that the stock market has crashed, it’s time to look at how long it might take to recover.

It’s an honest question on my part. I have a daughter in a new career and starting to contribute to a retirement account. My wife has a 401k and is a decade away from retirement. I handle my retired parents’ money. And I have other family and friends who follow traditional brokerage advice and have the conventional 60% of their portfolios in stocks (who aren’t very happy right now).

I asked this how-long-to-recover question to my stock broker a long time ago, and he proudly pointed to a chart of the S&P on his wall that I swear was 12 feet long. It actually covered two walls. I felt like I was at a tennis match as I glanced back and forth through history.

It showed over looooong periods of time that despite numerous crashes and corrections and bear markets, the stock market ultimately marches higher on a nominal basis. My broker was beaming.

But I did notice one thing about this sideways totem pole stretched across his walls. Over the past 100 years or so, there were a handful of crashes that looked like the Grand Canyon. And it looked like these crashes took a looooong time to recover.

What if an investor bought just before one of those Grand Canyon selloffs, I asked myself? Even if they dollar cost average it’s obvious they wouldn’t get back to even anytime soon.

And then I remembered something else…

My Dad grumbled a lot about inflation in the late 1970s. I was mostly a girl-chasing teenager at the time so didn’t pay much attention, but the general message did stick with me.

So then my question became, if the recovery from a stock market crash took a long time, wouldn’t inflation erode my real rate of return? Even if inflation was “low”?

That’s not a theoretical question. Because at some point you’re going to spend the proceeds.

If it took ten years for stocks to recover, for example, I might have earned back the $20,000 I lost—but now the car I’d planned to buy with the proceeds cost $30,000. Or $40,000. Show me all the long-term charts you want, Mr. Mainstream Stock Broker, but I still can’t afford to buy that car.

Therefore, telling me the S&P 500 has returned to its nominal (same dollar price) high isn’t good enough. Some of these bear markets last so long that I have to factor in the erosion of my purchasing power. This reality would be especially painful if I’m trying to do it as a retiree.

So let’s be a little more honest in our inquiry about stock recovery periods and adjust them for inflation…

History of Crash Recovery

We researched the four biggest crashes in the S&P 500 over the past 100 years. We measured the time it took to return to its nominal price—and then calculated the amount of inflation that occurred over that period and measured how long the “real” return took.

The results are sobering. Real recovery times are longer than you think…

This table lists the time it took the S&P 500 to return to its nominal high, and then the time it took to reach that high after adding in inflation. The column in red shows how much longer it took to reach the same purchasing power as what the investor had before the crash.

S&p 500 Recovery Time from Major Crashes, Nominal vs. Inflation Adjusted

In the three biggest crashes, the additional time it took to regain the same buying power was measured in years. In two cases it took seven or more years, in one case over four years. Just to get back to even.

In other words, even when the nominal price of the S&P climbed back to the prior price, it had taken so long that the proceeds would no longer buy as much. Your brokerage statement might show you’re back to even in dollar terms, but in real terms you’d still be underwater. It’s a sobering realization, one that dawns on most people only when they go to actually spend the money.

Here’s the breakdown of the recovery periods:

  • Inflation readings were as low as -10.3% during the Great Depression. But the S&P had fallen so far that inflation had returned before it recovered. Inflation totaled 57.4% during the 25-year time span, resulting in the S&P not reaching breakeven until over four years after the nominal price did.
  • From 1972 to 1980, inflation totaled a whopping 107.4%. High inflation rates combined with the depth of the crash and duration of the recovery made stocks “dead money” for an additional seven years after the nominal price was reached.
  • Those supposedly “low” inflation readings the government claims we’ve had in the new century? Starting with the “tech wreck” in 2000, inflation totaled 35.7%, prolonging the real recovery in purchasing power an additional seven years and nine months.
  • The bounce-back from the 2008 crash took five and a half years, but an additional half year to regain your purchasing power.

The table doesn’t show it, because daily data is hard to come by, but there’s another period we should mention…

  • Beginning in 1906, which included the Panic of 1907, it took the S&P 500 a full 20 years to return to its inflation-adjusted, pre-crash level. The total amount of inflation during that time period was 74.0%, meaning it took a whopping two decades just to get back to even.

It’s painfully obvious that the biggest stock market crashes in history have lasted long enough that inflation significantly lengthened a real recovery. Do stock brokers include this fact when they tout equities and claim “stocks always come back”? Clearly they should be.

Will the current crash morph into a bear market where inflation erodes purchasing power and forces the real recovery to take years longer?

I’ll let you decide that for yourself. But I do know that the best defense against both the prospect of a prolonged bear market and the corroding effects of inflation is gold.

And in the big picture I’m with Mike: gold and silver might not just be our best defense, but the most exciting offensive investments in the world in the years just ahead.