Insights + Resources

How Markets Bottom

Mar 24, 2020

Stock Market Bottom
Nobody knows exactly how this market bottom will play out.

With US equities firmly in a bear market, even the most long-term investors are now looking ahead to when the selling may stop and where the S&P 500 Index might ultimately bottom. “Nobody knows exactly how this market bottom will play out,” said LPL Financial Senior Market Strategist Ryan Detrick. “However, using history as guide, we know markets tend to retest or even slightly break previous lows.”

We took a look at how markets have bottomed for two previous bear markets that show similarities to the current sell-off, in terms of speed and magnitude. As shown in the chart below, following Black Monday, the largest single-day decline in the history of the S&P 500, the index rebounded modestly, before undercutting its lows about six weeks later. However, a look at the bottom panel shows that the momentum, or speed, of that move was significantly less extreme and markets went on to rally, ultimately eclipsing the 1987 peak less than two years later.

How markets bottom
How Markets Bottom in 1987

View expanded chart.

The 2008-2009 financial crisis tells a similar story. While the S&P 500 Index didn’t ultimately reach its low until March 2009, most stocks actually bottomed during the fall 2008, following the collapse of Lehman Brothers. Even though the S&P 500 undercut the October lows by a full 10%, this divergence, similar to the momentum observed in 1987, shows that things were improving under the surface even if the price of the index didn’t yet reflect it.

Market Bottom Chart
How markets bottom in 2008

View expanded chart.

It may be too early to say that the initial leg of our current decline is done, but certainly we have seen extreme fear and a historic decline in markets. One positive—the S&P 500 has yet to close below its December 2018 lows. Soon it may be time to start hunting for signs of a bottom.

 

Tags: ,

More Insights

Sep 30, 2020

Most recently, you may have read that Federal Reserve Chair Jerome Powell announced a change in how the Fed views inflation. In the past, the Fed said it would consider adjusting bond market short-term rates when inflation approached 2 percent. But in light of 2020’s many challenges, the Fed’s new policy may allow inflation to … Continue reading “The Bond Market Listens When the Fed Talks Inflation”

Sep 28, 2020

A U.S. drug company recently said that it’s in late-stage trials for its coronavirus vaccine and reported that it could be given to Americans as early as the end of the year.1

Sep 25, 2020

To some, this may hardly feel like an economy headed for a bright future. But don’t tell that to home builders. Builder confidence in August jumped to an eye-popping 78 in August, according to the Housing Market Index courtesy of the National Association of Home Builders. To put that number in perspective, anything over 50 … Continue reading “Home Builders Confident in Economic Rebound”

Sep 23, 2020

When it comes to retirement, some women face obstacles that can make saving for retirement a challenge. Women typically earn less than their male counterparts and often take time out of the workforce to care for children or other family members. Added to the fact that women typically live longer than men, retirement money for … Continue reading “Women Facing and Conquering Retirement Challenges”

Sep 21, 2020

Football is back, which means Summer is coming to a close, days will get shorter, and sweaters will soon be in play. This year, there was no pre-season, so professional football started in September, which coincidentally, is a perennial month for stock market volatility.1

Insights + Resources >