Corrections are commonStock market downturns—corrections and bear markets—are relatively common. Since 1980, the global stock market* has experienced 12 corrections and 7 bear markets—on average, an attention-grabbing downturn every 2 years or so. Over the past 36 years, stock prices have spent almost 30% of the trading days in corrections or bear markets. (Note: This analysis considers price returns only. In a total return analysis, returns would be higher, and recoveries quicker, because of reinvested dividends.)
Global stock prices (January 1, 1980—January 22, 2016)
|Declines||Number||Average return||Average time from peak to trough||Average time from trough to recovery|
|Correction||12||–13.7%||87 days||121 days|
|Bear market||7||–33.4%||373 days||798 days|
A similar story emerges from an analysis of the U.S. stock market’s more extensive historical data. Since 1928, the Standard & Poor’s 500 Index has spent 40% of the roughly 88-year span in some sort of setback—a correction or bear market. Over that same period, however, the index has produced an average annualized return of about 10%, outperforming lower-risk assets such as bonds and cash.** The stock market’s occasional—and sometimes severe—setbacks were the price investors paid to realize long-term returns superior to those of the lower-risk assets.
Note: Vanguard analysis based on the MSCI World Index from January 1, 1980, through December 31, 1987, and the MSCI AC World Index thereafter. Both indexes are denominated in U.S. dollars. Our count of corrections excludes corrections that turn into a bear market. We count corrections that occur after a bear market has recovered from its trough even if stock prices haven’t yet reached their previous peak.
Depths and duration have variedSome corrections are swift, others grind lower slowly. The time from a market trough to recovery has been similarly unpredictable. Consider a few observations from the global stock market data:
- The average number of days from the start of a correction to its bottom was 87 days. The fastest decline was 28 days, while the slowest was 124 days.
- The average number of days from a correction’s trough to recovery was 121 days. The speediest rally was 46 days, the slowest 359 days.
- The average number of days from the start of a bear market to its bottom was 373 days. The fastest decline was 60 days, while the slowest was 926 days.
- The average number of days from a bear market trough to recovery was 798 days. The quickest recovery was 85 days, the slowest 1,928 days.
Surprising and inevitableThe bold-face headlines announcing each downturn make the turmoil seem shocking. That’s true to an extent. In each correction or bear market, a surprise catalyst disturbs the status quo. At the same time, the setbacks are inevitable. We expect stocks to produce higher long-term returns than bonds and cash precisely because they experience occasional downturns. A review of corrections and bear markets suggests that patience and discipline are the best response to market turmoil. Vanguard’s economic investment outlook for 2016 underscores the potential benefits of a long-term perspective. Our outlook includes a range of projected outcomes for each asset class in the coming decade:
- We expect the central tendency for global stock market returns to be in the 6% to 8% range, as detailed in the outlook.
- We expect the central tendency for global bond returns to fall in the 2%–2.5% range. As the outlook explains, these muted expectations reflect an era of low interest rates and low inflation.
*As represented by the MSCI World Index from January 1, 1980 through December 31, 1987 and the MSCI AC World Index thereafter.
**Average annualized returns, January 1, 1928, to December 31, 2015: U.S. stocks = 9.72%; U.S. bonds = 5.41%; cash = 3.49%. Stocks are represented by S&P 500 Index. Bonds represented by Standard & Poor’s High Grade Corporate Index from 1926 to 1968, the Citigroup High Grade Index from 1969 to 1972, the Lehman U.S. Long Credit Aa Index 1973 to 1975, and the Barclays Capital U.S. Aggregate Bond Index thereafter. Cash is represented by U.S. Treasury bills.
***See, for example, Vanguard’s Principles for Investing Success, p. 10.
The projections or other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.
The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based. The VCMM is a proprietary financial simulation tool developed and maintained by Vanguard Investment Strategy Group. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time. The primary value of the VCMM is in its application to analyzing potential client portfolios. VCMM asset-class forecasts—comprising distributions of expected returns, volatilities, and correlations—are key to the evaluation of potential downside risks, various risk-return tradeoffs, and the diversification benefits of various asset classes. Although central tendencies are generated in any return distribution, Vanguard stresses that focusing on the full range of potential outcomes for the assets considered is the most effective way to use VCMM output. The VCMM seeks to represent the uncertainty in the forecast by generating a wide range of potential outcomes. It is important to recognize that the VCMM does not impose “normality” on the return distributions, but rather is influenced by the so-called fat tails and skewness in the empirical distribution of modeled asset-class returns. Within the range of outcomes, individual experiences can be quite different, underscoring the varied nature of potential future paths.
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Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Diversification does not ensure a profit or protect against a loss.
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