As an stock investor, I worry about when the next financial crises will happen.
Based on S&P 500 historical data1, there are five major financial crises, including the resent Covid-19 crisis, over the last 92 years. On average, every 18.4 years, there is a major financial crisis.
Detail Data
| Starting Month | Recovery Month | Duration | Worst Return |
|---|---|---|---|
| 1929/9 | 1956/4 | 26y5m | -81.3% |
| 1968/11 | 1992/1 | 23y2m | -61.1% |
| 2000/5 | 2014/8 | 14y3m | -45.6% |
| 2007/10 | 2013/11 | 6y1m | -53.3% |
| 2019/12 | 2020/7 | 8m | -20.3% |
How Long does it Take for the Stock Market to Recover its Previous High?
The worst major financial crisis was the the Great Depression of 1929, It took the S&P 500 index 26 years and 5 months to recover its previous high.
The least worst case was the recent Covid-19 pandemic crisis which took the
S&P 500 index only 8 months to recover its previous high.
On average, it takes the S&P 500 index 14 years and 2 months to recover its previous highs.
How does a Financial Crisis Happen?
- The Great Depression was believed to be caused by the reduction of consumption and investment spending and the tightening of money supply.
- The depression of 1968 was arguably caused by too much money spending on Vietnam War and the Fed raising interest rates.
- The 2000 financial crisis was arguably caused by the Fed's tightening policy that failed to "soft land" the economy just recovered from the 1990 dot-com bubble and the 1997 Asian financial crisis.
- The 2008 financial crisis was caused by lack of oversight on mortgage-backed securities.
- The 2020 financial crisis was caused by the Covid-19 pandemic.
Will the Present Situation get Worse Like the Case of the 2000 Financial Crisis?
Since December, 2015, the Fed had raised rates from 0%-0.25% to 2.25%-2.5%. It
was a sign of good economic recovery from the 2008 financial crisis. Now the
Fed has lowered the federal funds rate to 0%-0.25% again for the impact on the economy caused by the Covid-19
pandemic.
Although the stock market seems healthy, I think it's best to keep an eye
on any economic data that the Fed deem indicating whether the economy is expanding
or shrinking, such as employment data and consumer price index.
What Can We Do?
We should consider invest for more than 27 years if we want to invest in stocks,
because it only took the S&P 500 index only 26 years and 5 months to recover its previous high during the worst financial crisis of 21th century, the Great Depression.
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