Bear market recovery: how long does it really take?

How long does it take equities to recover from a bear market?

By that I mean not just how long does it take for a bear market to end. Bears can be officially over in months.

But how long does it take us for us to recover our losses? To get back in the black?

Sadly, that’s a much longer slog… 

UK bear market recovery times

The financial software people at Timeline have produced an excellent chart tracing the severity and length of UK bear markets.

They calculated the recovery time for £100,000 of UK equities after each bear market from 1926 to the end of 2021. 

The graph line reveals the extent of the loss at market bottom. 

The END dates show when your investment finally breaks even – that is, when your investment is worth £100,000 again (dividends reinvested). 

The data reveals that the:

Average bear market recovery time is 18 monthsShortest bear market recovery time was 11 months (Fallout from the US ‘Vietnam War’ recession)Longest bear market recovery time was two years and seven months (Dotcom bust)

That’s recovery time after the end of the bear market itself. 

How long does the whole thing take?

The total duration of a bear market event is more daunting when you add its downward leg to the recovery time back to breakeven:

Data from the Timeline Chart 2022. Dividends reinvested. Nominal returns.

The total length of a bear market including recovery time is: 

On average: three years and one monthShortest: one year and four months (Coronavirus crash)Longest: five years (Dotcom bust)

Quite the buzz kill, right? The total recovery time was still over a year for even the short yet savage 1987 and pandemic crashes – despite the fact that both lasted only a couple of months as bear markets. 

And grim as these totals already are, they also miss out a crucial component: inflation

Because as investors living in the real world, we don’t care about the beauty contest that is nominal wealth.

We care about our purchasing power. So we need to know how much our investments are worth in real terms.1

The question: how soon do we recover from a bear market, taking into account inflation?

UK real-return bear market recovery times

Professor Wade Pfau calculates the UK stock market took 11 years to recover in real terms from its 1972-74 crash. As opposed to four years and ten months in the nominal returns table above.

And using crude annual returns, I’ve calculated the real recovery time for a few more UK bear markets (dividends included) as follows:

Bear market
Nominal recovery
Real recovery
Real duration

1929-32
1935
1932
3 years

1937-40
1941
1944
7 years

1972-74
1977
1983
11 years

2007-09
2011
2013
6 years

Ironically, UK deflation shortens the real recovery time of our version of the 1929 crash.

But when it comes to the other three UK bear markets, factoring in the wealth-whipping headwind of inflation pushes out recovery times significantly. 

US bear market real-return recovery times

We can calculate real-terms recoveries more accurately thanks to publicly available data for the US stock market.  

Here are the inflation-adjusted bear market recovery times for the S&P 500:

Calculations made using DQYDJ’s S&P 500 return calculator. Monthly returns. CPI-adjusted. Dividends reinvested. Fall % is a nominal return.

Now we have a more realistic view of the impact of multiple bear markets

Bear market recovery time, adjusted for inflation, and including the down leg measures:

On average: four years and four monthsShortest: six months (Coronavirus crash)Longest: 13 years (Dotcom bust)

However, if we bundle up the series of slumps that marked the Great Depression, we get one giant bear lasting from September 1929 to January 1945. That’s 15 years and four months until you broke even.2

At least that’s better than the oft-quoted 25 year recovery time that doesn’t include dividends or deflation, and is based on the narrower Dow Jones index.

We can see that inflation adds more than a year on average to bear market recovery times by crudely comparing the UK’s nominal three year and one month average to the full-fat four year and four month total bear duration. 

Moreover, the US suffered three lost decades. One great bear leaves investors covered in paw prints every 20 to 25 years. 

There’s a fairly clear, if imperfect, correlation between the depth of the decline and the length of the recovery. 

Once we’re slammed into -45% territory then you’re looking at a real return recovery time of half a decade or more. 

What’s the worse case scenario?

As detailed in our gargantuan bear markets primer, major meltdowns can be brutal. It took more than 31 years to recover from Japan’s 1989 bear market. 

The worst bear I’ve read about is Austria’s 89 year wait to breakeven. That followed a -96% carve-up in 1914-25. 

My best investment advice: don’t invest all your money into an empire that loses a world war and is permanently dismembered in the aftermath. 

In fact, even Austria’s death plunge isn’t as bad as the total wipeouts sustained by Russian and Chinese investors after their Communist Revolutions.

Buy and hold definitely doesn’t work when the Marxists shut down the stock exchange. 

Living in the real world

Above we’ve considered market data. But in reality, the bear market recovery time we experience will be further drawn out by investment costs.

We can improve our results by pound-cost averaging through the downturn – and by diversifying into defensive assets such as government bonds ahead of time.

The chart below shows how a higher allocation to high-quality government bonds sped up the recovery from the coronavirus crash vs a pure equities portfolio:

Source: JP Morgan: Guide to the Markets. 31 May 2022. Page 63.

Perhaps even more importantly, a 60/40 portfolio dramatically reduced the severity of the bear market.

Experiencing shallower swoons makes it easier to stay the course. It’s far harder to come back from a bear market if you panic sell after a deep loss, lock in your losses, and then miss the rebound.

Take the right steps to protect your portfolio ahead of time. It’s usually too late once a bear market runs wild.

Take it steady,

The Accumulator

Real returns subtract out inflation from your investment results. They’re thus a more accurate portrayal of how your capital has grown in relation to purchasing power than are standard nominal returns.The November 1936 recovery from the 1929 crash lasts only a few months before the next bear begins in March 1937.

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How long does it take to recover your losses from a bear market? Longer than we’d like
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