A recovery is coming, but no one knows when.
The stock market rallied modestly in the first two and a half months of 2023, but that has not been enough to make up for an abysmal 2022 during which the S&P 500 index plunged by nearly 19%. Plus, new concerns about the banking industry that began with the collapse of Silicon Valley Bank earlier this month have left many investors on edge.
It's frustrating to watch your investments stagnate or drop in value. So it's understandable that many people are wondering: When will the stock market recover? But that's the wrong question to ask. A better question would be: How much volatility can I withstand?
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No one knows when the stock market will recover
Heading into 2022, the median prediction among 45 strategists polled by Reuters was that the S&P 500 would climb by 7.5% to 4,950 that year. The index is a closely watched barometer because it represents more than 80% of the value of the U.S. stock market. Instead, the index's 19% drop made 2022 its worst year since the financial crisis of 2008.
The truth is, Wall Street has a lousy track record when it comes to short-term predictions. The good news is, that doesn't matter to long-term investors. History strongly suggests that a recovery will happen at some point. We simply don't know when.
The average annual U.S. stock market return over the last 50 years has been about 10% before you adjust for inflation. Few of those years have actually delivered returns in the neighborhood of 10%, though.
For example, in the 50 years between 1972 and 2021, the S&P 500 had 19 years in which its returns exceeded 20%. Just three years saw losses of more than 30%. But over long periods of time, the stock market has a stellar track record. Between 1928 and 2018, 94% of 10-year investment periods delivered positive returns. And over 20-year stretches, returns were positive 100% of the time.
Consider your risk tolerance instead
Instead of trying to time your investments, consider your risk tolerance. If you're planning to retire in the next couple of years and your blood pressure rises every time the stock market dips, you have a low risk tolerance. You may want to consider investing conservatively by allocating more of your money to safe investments such as bonds and blue chip dividend stocks.
But if your retirement is more than a decade away or your reaction when the stock market nosedives is to invest even more, you have a higher risk tolerance. You'll want to focus primarily on stocks, including those with greater growth potential, though those also carry higher risk.
Two important caveats, though: Even if you're a risk-averse investor, there are big risks to playing it too safe. A $100,000 investment in the Vanguard Total Stock Market ETF (VTI -0.79%) made at the beginning of 2008 would be worth roughly $350,000 today. But the same investment in the Vanguard Total Bond Market ETF (BND 0.13%) would have grown to just $145,000. Taking too little risk means you'll have to invest significantly more, and you may not achieve enough growth to build the nest egg you require.
VTI Total Return Level data by YCharts.
Secondly, even people with high risk tolerances should typically have a small portion of their money invested in safer assets like bonds, and they should gradually shift their asset allocations in a more conservative direction as they near retirement.
Generally, you should avoid investing money in stocks if you expect to need it in the next five years. But if you have a longer time horizon, the stock market is a fairly safe place to invest your money. Recoveries from downturns are almost inevitable -- but trying to predict the timing of one is a futile exercise.
FAQs
It typically takes five months to reach the “bottom” of a correction. However, once the market starts to turn, it can recover quickly. The average recovery time for a correction is just four months! That's why investors with truly diversified portfolios may consider staying investing for the long-term.
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Since launching in 2002, the Motley Fool Stock Advisor has delivered an average stock return of 644%*, significantly outperforming the S&P 500's 149% return in the same timeframe.
What is the stock market prediction for 2024? ›
The market sees a greater than 80% chance of at least five rate cuts from current levels by the end of 2024. Investor optimism about the economic outlook has improved dramatically from a year ago, but there's still a risk that Fed policy tightening could tip the economy into a recession in 2024.
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How long did it take the stock market to recover from the 2008 recession? ›
For example, it took the stock market just over two years to recover from the 1987 stock market crash. However, it took the market almost six years to recover from the dot-com bubble burst in 2000. For the financial crisis of 2008, it took close to five years for the stock market to bottom out and start recovering.
How long did it take for stocks to recover after 2008 crash? ›
The bounce-back from the 2008 crash took five and a half years, but an additional half year to regain your purchasing power.
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What is the average stock market return over 50 years? ›
Stock Market Average Yearly Return for the Last 50 Years
The average yearly return of the S&P 500 is 11.3% over the last 50 years, as of the end of February 2024. This assumes dividends are reinvested. Adjusted for inflation, the 50-year average stock market return (including dividends) is 7.18%.
Should I pull my money out of the stock market? ›
It can be nerve-wracking to watch your portfolio consistently drop during bear market periods. After all, nobody likes losing money; that goes against the whole purpose of investing. However, pulling your money out of the stock market during down periods can often do more harm than good in the long term.
Analysts expect S&P 500 profits to jump 8% in 2024 and 14% in 2025 after subdued growth last year. Robust global economic growth may offer equities enough support to resume a record-breaking rally, even if bets on Federal Reserve interest rate cuts this year are completely abandoned.
Will bonds outperform stocks in 2024? ›
Stocks and bonds deliver positive returns and cash underperforms both as the Fed pivots to rate cuts. Stocks and bonds may both be poised for success in 2024. Easing inflation and a pivoting Fed should reduce headwinds that have faced both asset classes in recent years.
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How long did it take the stock market to recover after the 1929 crash? ›
The slide continued through the summer of 1932, when the Dow closed at 41.22, its lowest value of the twentieth century, 89 percent below its peak. The Dow did not return to its pre-crash heights until November 1954. The financial boom occurred during an era of optimism.
How long did it take for the stock market to recover after 1987? ›
Compared with the Stock Market Crash of 1929, which sparked the decade-long Great Depression, the markets recovered relatively quickly after the stock market crash of 1987, regaining their pre-crash heights within two years.
How long does it take to recover from a 1929 crash? ›
The largest percentage increases of the Dow Jones occurred during the early and mid-1930s. In late 1937, there was a sharp dip in the stock market, but prices held well above the 1932 lows. The Dow Jones did not return to its peak close of September 3, 1929, for 25 years, until November 23, 1954.
Do I lose all my money if the stock market crashes? ›
When the stock market declines, the market value of your stock investment can decline as well. However, because you still own your shares (if you didn't sell them), that value can move back into positive territory when the market changes direction and heads back up. So, you may lose value, but that can be temporary.
