asset allocation  |  May 6, 2020

Investing in Equities Amid a Crisis

A recent study of stock market downturns over the past 90 years offers interesting insights about market timing.


Key Points

  • An analysis of previous market sell-offs implies that timing the market bottom perfectly may not be necessary to achieve a positive outcome.

  • In our view, patient, long-term investors could potentially reap gains whether they buy stocks early or late in a downturn.

Tim Murray, CFA

Capital Markets Strategist, Multi‑Asset Division

During periods of market stress, it can be incredibly difficult to gauge when to invest in stocks in order to benefit from the pursuant recovery. Our multi-asset team’s recent analysis of prior market sell-offs concluded that investors may not have to time the market bottom perfectly to have a positive outcome.

We reviewed daily pricing data for the S&P 500 Index over 90 years from January 3, 1928, to January 31, 2020, and found 17 instances where the index declined from peak to trough by 15% or more.1 We then examined the performance difference between the stock index and U.S. bonds during those drawdowns and subsequent recoveries. We also evaluated performance from various start dates before and after the market bottom to represent a hypothetical investor’s purchase at different times.

How Early Is Too Early?

Forward Relative Returns1 for U.S. Equities vs. U.S. Bonds2

The chart shows the percent and time period from the trough for 1) Average Subsequent Six-Month Return, 2) Average Subsequent 12-Month Return, and 3) Average Subsequent 18-Month Return. The time periods before and after the trough based on six months, three months, and one month as well as two weeks and one week before.

Past results are not a reliable indicator of future results. Index performance is for illustrative purposes only and is not indicative of any specific investment. Their performance does not reflect fees and expenses associated with an actual investment. Investors cannot invest directly in an index.
Actual investment results may differ.

US Equities are based on daily price returns for the S&P 500 Index, January 3, 1928, through January 31, 2020. Source: Standard & Poor’s (see Additional Disclosure).
Chart shows the average subsequent returns at different time periods before, after and at the trough (market bottom) over the 17 instances of the S&P 500 Index decline.
1Relative returns represent the outperformance or underperformance of stocks compared to bonds.
2Fixed income data use an estimate of daily interpolated Ibbotson returns for the earlier time period from January 3, 1928, to December 29, 1961, and 5-yr. U.S. Treasury total returns where daily data are available from January 2, 1962, to January 31, 2020.

We discovered that, on average, stocks outperformed bonds over the ensuing 18 months whether a hypothetical investor bought them six months before the market bottom or six months afterward. Results were positive either way, but hypothetical purchases made after the market bottom typically resulted in stronger gains. However, results over shorter-term horizons (six and 12 months) were mixed.

We also found that “hit rates”—how often relative returns were positive for stocks versus bonds—were higher closer to the market bottom. Over an 18-month horizon, hit rates were higher, on average, for stocks bought three months before or after the bottom versus six months before or after the bottom. Once again, buying late provided slightly better relative results.

Our study suggests that investors need not be overly focused on timing market bottoms perfectly. We believe that patient investors with long-term investment horizons could potentially benefit regardless of whether they invest in stocks early or late in a downturn.

1To identify what constitutes a trough or major drawdown event, we used S&P 500 Index price data from January 3, 1928, to April 3, 2020, to calculate the drawdowns from a previous peak (each peak being an absolute peak) and then identified the dates with the largest drawdown corresponding to each peak. From that, we implemented a 15% maximum drawdown threshold in order to find the historic dates that have had major drawdowns.

Additional Disclosure

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Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of May 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.



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