The Nasdaq has fallen by a quarter this year. The S&P 500 is down about 20% and the Dow by more than 10% by early May 2022. Inflation is raging and Fed actions to slow it could easily drive the economy into a prolonged recession. Add the continued supply chain disruptions (especially out of China) due to Covid, the war in Ukraine, and protectionism disrupting commodity markets. Things are likely to keep getting worse until the root causes are remedied. That raises the question: how long until the markets hit bottom?
When to Invest As a Market Crashes
Long term investors commonly benefit from buying good stocks for cheap when a correction or crash bottoms out. They look at both intrinsic stock value and the factors underlying the crash. Once a stock’s market value drops below its long term value based on forward looking earnings it is profitable to purchase it. However, the most profitable purchases are when an investor can spot when the bottom is reached. Thus, an appreciation of long market crashes last and when they turn around is important for timing one’s purchases.
The 1929 Stock Market Crash Lasted Until 1932
The 1920s were a similar decade to the years after the Financial Crisis. In the 1920s one could buy stocks for 10% down and in the last decade interest rates were historically low. Both time stock prices went steadily up and profits were easy until they weren’t. The Dow Jones Industrial Average rose from 63 in August 1921 to 381 by September 1929. Then on Black Monday, October 28, 1929, the stock market crashed 13% in one day. The next week on Black Tuesday the Dow went down 12% more. Three weeks after the crash started half the market’s value was gone. But that was not the end of it. The stock market continued to fall in fits and starts until the middle of 1932, nearly three years later when it hit 41.2 which was 11% of its value before the crash. (Federal Reserve History)
What Factors Decide How Long a Market Continues to Crash?
Since the crash from 1929 to 1932 the market has fallen into correction or crash territory twenty-five more times. The average time it takes is 289 days. The factor that all of these have in common is that they last so long as the things that cause them last or are not remedied. For example, the Covid crash lasted until the Fed started pouring money into the economy. The problem today is that there are three factors driving the crash and not one. There is still excess money in the economy and Covid is still a factor in the supply chain. Specifically, China is using draconian lockdowns in its zero tolerance approach to Covid. And Russia’s war on Ukraine has brought on sanctions, higher prices for oil, natural gas, agricultural products, and strategic minerals. This mix of issues will take longer to remedy because this time around the Fed is busy raising interest rates to fight the worst US inflation in 40 years.
1929 vs Now
The stock market was overvalued in 1929 largely because one could buy stocks for 10% down and then pay interest to the broker. This leveraged system was ripe for a crash but would have remedied itself after prices fell far enough. Unfortunately, Congress passed the Smoot Hawley Tariff which affected Europe mostly and Europe retaliated causing a trade war. That brought on the Great Depression which lasted until the start of World War II a decade later. Today’s crash would be simple if it only had to do with excess money supply and would be fixable by the Fed raising interest rates and reducing its balance sheet. But these actions will not cause China to stop locking down cities like Shanghai with 25 million people or make Putin withdraw his troops from Ukraine and stop hoarding grain and fertilizer. Fed actions will not halt Europe’s actions in finding different suppliers for oil, coal, and natural gas causing Russia to sell at discounts to India and other nations. The bottom line is that the similarities between 1929 and now lead us to believe that this crash will last until the root causes are remedied which could take months or even years!
How Long Until the Markets Hit Bottom? – SlideShare Version
How Long Until the Markets Hit Bottom? – DOC