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

The Team 
JAN 23, 2024

With everything going on in the world right now, do you worry about the potential for a stock market crash? Whether one materializes or not, this is a good time to consider how long it might take to recover from it, in real terms.

That’s an important consideration, since the argument “the market always goes up over time” overlooks the corroding effects of inflation and the reality of declining purchasing power, especially when the recovery is long and inflation is high.

Let’s dive into how long it really takes to recover from a big stock market crash, along with how gold has performed during the longest recovery periods.

The Big Factor Stock Brokers Overlook

Many years ago I asked my traditional stock broker the how-long-to-recover question, and he proudly pointed to a chart of the S&P on his wall that must’ve been 12 feet long. It actually covered two walls. I had to turn 90 degrees just to take in the whole thing.

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

But I noticed something in the sideways totem pole. Over the past 100 years or so, there were a handful of crashes that looked like the Grand Canyon. And they 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 didn’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 distracted disco-dancing teenager at the time so didn’t pay much attention, but the general message stuck with me.

So then my question became, if the recovery from a stock market crash took a long time, wouldn’t inflation take it longer to get back to even?

A recovery in real terms is not a theoretical exercise. Because sooner or later 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 had before the crash—but now the car I’d planned to buy with the proceeds cost $30,000. Or $60,000. Show me all the long-term charts you want, Mr. Mainstream Stock Broker, but I still can’t afford to buy that car.

Therefore, showing me the S&P 500 has returned to its nominal (same dollar price) high isn’t good enough. Some of these bear markets last long enough that I have to factor in the erosion of purchasing power in those dollars. This reality is especially critical to consider if you’re a retiree. And it’s important for everyone now with inflation soaring.

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

Sobriety Alert

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 much longer than many investors are aware…

The following 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.

How does gold protect you from stock market losses?

In the three biggest crashes, the additional time it took to regain the same buying power was measured in years (red column). In two cases it took seven years or more, and in another 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 the same dollar amount, but the purchasing power of those dollars has significantly eroded. It’s a sobering realization, one that doesn’t dawn on most people until they actually spend the money.

Here’s the breakdown of the bigger recovery period:

  • 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 stock market 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 were deep enough and lasted long enough that inflation greatly prolonged a recovery in real terms. Do stock brokers include this fact when they tout equities and claim “stocks always come back”? Clearly they should be.

Gold to the Rescue

The natural follow-up question we here at GoldSilver wanted to ask is this: did gold preserve purchasing power during these periods?

Let’s take a look… we excluded the crash during the Great Depression since the gold price was fixed at the time (and then became illegal to own in the US), but here is gold’s inflation-adjusted performance during the other three big stock market crashes (green column).

Gold’s Inflation Adjusted Performance During Crashes

Gold didn’t just preserve purchasing power, it grew it! Again, this is after adjusting for inflation.

You’ll also notice that the longer the recovery period, the better gold did. This underscores gold’s ability to preserve purchasing power, as well as its role as an effective hedge.

The best defense against both the prospect of a prolonged bear market and the corroding effects of inflation is gold. This factor is especially critical to consider now, given how 1) overvalued the stock market is and 2) stubborn high inflation has become. This double whammy that could inflict serious, long-term damage to a stock portfolio.

So, if you’re an investor in common stocks, you might want to consider adding a meaningful amount of gold to your portfolio, because history shows that whenever the next crash occurs, you’ll have a shield in place, no matter how long it takes to recover.

And in the big picture, regardless of what the stock market may do, Mike Maloney’s research shows gold and especially silver may be the most exciting investments in the world in the years just ahead.

I’m sure glad I own it. How about you?