The circumstances of the current market crash might be unique to the coronavirus pandemic, but they lead investors to wonder: Are such drops normal for equity markets, or is this different?
During the global financial crisis of 2007–09, some observers described the events that unfolded as a “black swan,” meaning a unique negative event that couldn’t be foreseen because nothing similar had happened before. But the data I’d seen from Ibbotson Associates, a firm that specialized in collecting historical market returns (and which Morningstar acquired in 2006 and merged into Morningstar Investment Management LLC in 2016), demonstrated a long history of market crashes. Some ended up being part of a larger financial crisis.
So, if these “black swan events” happen somewhat regularly—too frequently to render them true black swan events—then what are they? They’re more like “black turkeys,” according to Laurence B. Siegel, the first employee of Ibbotson Associates and now director of research for the CFA Institute Research Foundation. In a 2010 article for the Financial Analysts Journal, he described a black turkey as “an event that is everywhere in the data—it happens all the time—but to which one is willfully blind.”
Here, I take a look at past market declines to see how the current coronavirus-caused market crisis compares.
How Frequent Are Market Crashes?
The overall number of market crashes depends on how far back we go in history and how we identify them.
In this case, I consider market crashes over the past nearly 150 years. The chart below uses real monthly U.S. stock market returns going back to January 1886 and annual returns over the period 1871–85, which I originally compiled for Siegel’s 2009 book, Insights Into the Global Financial Crisis. Here, I use the term “bear market” (generally defined as a decline of 20% or more) interchangeably with the term “market crash.”
Each bear-market episode is indicated with a horizontal line, which starts at the episode’s peak cumulative value and ends when the cumulative value recovers to the previous peak.
The chart shows that over this period of almost 150 years, $1 (in 1870 U.S. dollars) invested in a hypothetical U.S. stock market index in 1871 would have grown to $15,303 by the end of March 2020.
But it wasn’t a smooth ride to get there. There were many drops along the way, some of which were severe.
The market always eventually rebounded and went on to new highs, but it may have been hard to believe this during some of the long-term…