Bad Market Years Usually Lead to Good Ones

There's blood everywhere in the markets.  And it doesn't look like stocks will recover anytime soon. 

The Wall Street Journal warns we could be looking at a "Lost Decade for Stocks…" 

And MarketWatch.com says we're in for a "summer of pain." 

According to the latest MLIV Pulse survey of 1,000 investors, the market will bottom around 3,500. That's a further 10% drop from the current level. Throw in the fact that CNN's Fear & Greed Index is now at 13 (on a scale of 1 to 100), which puts it in the "extreme fear" area. And the CBOE Volatility Index (VIX) remains above 30 - a very high anxiety level indeed.

All those sentiment measures indicate a pessimistic and fearful market that will see another leg down this year before putting in a bottom.

Macroeconomic factors (persistent inflation, Federal Reserve rate hikes, etc.) and geopolitical concerns (the war in Ukraine and the resulting high oil prices, Chinese lockdowns, etc.) would certainly seem to corroborate that outlook.

But here's the good news.

Very bad years for the market tend to be followed by good years.

You can see exactly that in the chart below, which shows the magnitude of the market's gain or loss (as measured by the S&P 500) every year since 1928.

Most - though not all - of the most dramatic market drops are followed by up years. Take a look for yourself...

And here are the actual figures, as computed by Ben Carlson of Ritholtz Wealth Management...

• After the 11 worst years in the U.S. stock market, the average gain the following year was 6.4%. The market was down five of those years.
• For the three years following those 11 worst market years, the market was up an average of about 35%, and there was only one negative period among those (after the 25% drop in 1930).
• And for the five years following those 11 drops, the market was up almost 80%. It was positive for every one of those five-year periods.

So if that MLIV survey is right and the market drops another 10% this year, this bear market will be a drop of 27% from the S&P 500's January high.

Which would make 2022 the fourth-worst calendar year for the market on record.

Still, history suggests that the market will see a modest gain in 2023 - and that you are likely to recover your bear market losses within three years and see very solid returns over the 2023-2027 period.