The Stock Market's Rebound Has History on Its Side

The benchmark S&P 500 Index’s recent rebound has brought it more than halfway back from its 2022 low point in mid-June, which is an encouraging sign for many investors. It’s certainly one of the most statistically reliable signals in the stock market. But does that mean it’s safe to get back into stocks?

Since 1926, stocks have recovered more than half of a 10% or larger decline 79 times and only once, in March 1930, did the market reach a new low before setting a new all-time peak. Moreover, the average return in the month after the 50% point is reached is 2.7%, better than the 0.9% average for all months. The year after averages 16.0% versus 12.7% for all years. Volatility is lower than average after the 50% point as well.

Remember that past performance is not indicative of future results. And we know the stock market is pretty close to a random walk, so making investment decisions based on patterns in charts is a risky game. On the other hand, strong statistical patterns in securities returns are the main way we learn about markets. And we can tell a plausible story about this pattern. Something bad happens and stocks fall. The drop scares a lot of people who flee the market. It exposes weak hands who are forced to sell, or even to go bankrupt and dump their assets. Few new investors are brave enough to buy stocks. For these reasons stocks fall more than the fundamental news justifies and stay down longer.