National tragedies, recessions…enough of the negative news already

February 29th, 2008 at 01:00pm Jerry Korabik

  Jerry S. Korabik, CFP®, AIFA® 

I find myself in the same position now that I was in a couple of years ago when it comes to dodging the volatility in the stock market.  Once more, I’m paddling upstream against all the negative press about how the sky is falling.  Back in 2005, I worked at Ibbotson Associates in Chicago.  Ibbotson is a firm specializing in providing data and market research on the capital markets.  Some of the analysis done a few years ago focused on the negative short-term effect on the market from “bad news events” and what happens when the markets recover.  The analysis of past data could be a good guide for investors that are now panicking about the current economic woes and the effect they are having on the stock market.  Most of this negative feeling is fueled by what the media is reporting.  Instead it’s important to look at what the markets tell us long term, after these negative events do occur. 

Such uncertainty in the market isn’t unusual, but it typically doesn’t linger.  Ibbotson analyzed the S&P 500 (large company US stocks) reaction short-term and long-term to national tragedies and economic recessions.  Though the results differed for each “tragedy” or market event, the ending story was the same…stocks recover and continue to move higher long-term. 

Some of the major market events studied were:

Event: Aug 2, 1990, Iraq invades Kuwait-after one month the market (S&P500) was down 4.9%, after 3 years it was up 57.7%

Event:  9/11/01-after one year, the market was down 20.5%, after 3 years it was up a cumulative 12.6%    

Other historical examples included Hurricane Camille in 1969, a major drought in 1988, Hurricane Andrew in 1992 and Midwest flooding in 1993.  On average, stocks in the S&P 500 index were off 1.3 percent one month after those disasters, but they had risen 4.4 percent six months later and stood 10.3 percent higher one year later.

Three years after the disasters, the S&P 500 stocks had posted an average 46.6% gain.

Ahh yes, but what about the “R” word?  Even during periods of recession… the song remains the same.  Since the stock market is driven by the performance of corporations, it is evident that a relationship exists between the performance of the stock market and the performance of the economy as a whole. 

History reveals that stocks (both small cap and large cap) have been one of the strongest performers after recessions.  Many investors fear the volatility of stocks. Their fears, however, may not justify overlooking the potential of these asset classes. There have been 10 economic recessions in the U.S. since the beginning of 1946.  Following these recessions, large cap stocks were up on average a cumulative 19.1% after one year.  Small cap stocks were up an average of 33.7%.  3years after a recession, large cap stocks averaged a cumulative 47.7% increase, 74% increase for small stocks.

These national tragedies and economic recessions often exert short-term impacts on the economy, but there are really no long-term effects.  We get through these things. Stay the course, as long as your time horizon and your goals are still in check, there is no reason to panic short-term, let the market run its course.

Source: Ibbotson Associates, Chicago 

Entry Filed under: Financial Planning, Investments