The History of Stock Market Dips and Recoveries

When it comes to the stock market, headlines rarely shy away from the bad news. Losses tend to make the front page, which can give investing a very doom-and-gloom backdrop. But it’s important to put stock market drops in context. When you understand the fuller picture, it becomes clear that the best way to lose money in the market is to panic sell. Taking the longer view tends to be the better approach. We’re in it for the long haul, so temporary market swings don’t impact our long-term investment philosophy—and there’s some pretty convincing data to support that outlook.

It can be tempting to pull your investments during times of uncertainty, especially when significant market dips are paired with hysteria. But if history has taught us anything it’s that staying the course is probably your best bet. The 60/40 portfolio is a great example. It consists of 60% stocks and 40% bonds. From 2000-2021, median returns for this type of portfolio were around 7.5%, according to investment research firm Morningstar. That’s despite a handful of major historical stock market dips that occurred during that time period.

Here’s a look at what the recovery looked like for three such events. Looking back on history makes a strong case for staying invested during market dips.

The Dot-Com Bubble Burst

When the internet began taking off and e-commerce became a buzzy new concept, entrepreneurs saw an opportunity to capitalize. The mid to late 90s brought a boom in dot-com startups—and venture capital funding was pouring in. Many investors were betting on the success of these internet companies, even if they weren’t yet profitable. 1995-2000 were big years for tech IPOs and the Nasdaq Composite reacted in kind—surging over 440%.

The problem was that many of these tech companies were simply overvalued. The Nasdaq eventually sank by over 80% before bottoming out in October 2002. The index didn’t fully bounce back until 2015. That means it took 13 years for the Nasdaq to recover to pre-crash values. However, other stock indexes recovered much quicker than that. While the annual percentage change of the S&P 500 remained negative through 2003, things swung back in a positive direction from 2004 to 2008.

The 2008 Financial Crisis

The housing crisis of 2008 had a domino effect that shook the stock market. Lenders essentially doled out mortgage loans to high-risk borrowers, and over time, tons of homeowners were defaulting—which turned financial markets upside down. It didn’t help that home prices were on the decline. For many homeowners, the amount they owed on their mortgages outweighed their home value. By the fall of 2008, the Dow Jones Industrial Average fell by 777 points in intraday trading—the most significant point drop in history at that time. 

The S&P 500 posted negative monthly returns, but things began turning around in June 2009. By the spring of 2013, the index had made a full recovery. In fact, it skyrocketed past the previous highs of 2007 and the 2000 tech bubble. Investors who panic sold and tried to time their reentry into the market likely missed out on all that growth.

Let’s take things a little deeper. If you’d invested $10,000 in the Nasdaq Composite at the peak of the financial crisis and held all your shares, that investment would have grown to roughly $89,000 by October 2020, according to one Investopedia analysis.

The 2020 Coronavirus Crash

The Covid-19 pandemic sent global markets into turmoil. Stay-at-home orders and a whole lot of uncertainty caused the stock market to take its biggest nosedive since the 2008 financial crisis. On March 16, 2020, the Dow Jones Industrial Average dropped by over 12% in a single day. Now for the bright spot. You guessed it, markets rebounded. After only four months, in July of 2020, the U.S. equity market was back to its pre-Covid peak. What’s more, it went on to reach new record heights.

Be that as it may, emotions can sometimes prevent us from seeing clearly. Four in 10 investors indeed pulled money out of the stock market over the past year due to current events, according to a recent MagnifyMoney survey—and 40% of them came to regret it. Not surprisingly, 70% of respondents said that world news and current events played a role in their financial decisions.

Tuning out the noise and sticking to your investment plan can be hard, but what we’ve seen time and time again is that it’s often the best way to net consistent returns over time. We’re here to help you fine-tune your approach if you need some expert insights, especially in light of current market volatility. Just remember that market swings come with the territory when investing over the long term.