April 2020

Market Rebound: How long does it take?

Objective: One of the many characteristics of the Equity markets is that it recovers from downfall
overtime to return to its previous peak – in effect, it is a reversible risk. However, we need to identify
how long it does take to recover.

Let us look at the Market (Sensex) returns, 3 years before and 3 years after every significant fall due to
the below-mentioned crisis:

3 Year Return Before % Fall 3 Year Return

Sr No. Year Event the Fall Started from Peak After the Fall
1 1986-88 Global Recession 203.7% -41.3% 199.5%
2 1990-91 Gulf War/Indian Fiscal Crisis 238.8% -38.7% 304.3%
3 1992-93 Harshad Mehta Scam 481.0% -54.4% 88.4%
4 1994-96 Stock Market Stumble 148.7% -40.7% 71.7%
5 2000-01 Dot Com Bubble 69.4% -56.2% 115.6%
6 2008 Subprime Crisis 225.1% -60.9% 110.1%
7 2020 Covid - 19 54.0% -38.1% ?
AVERAGE 227.8% -48.7% 148.3%
The Return and Fall % is absolute

Conclusion

As observed in the above table, there are 6 instances where markets have fallen significantly, and the
average of all those falls is -48.7 %. However, there is also an observation that after 3 years from the
fall, the markets recovered better than the previous peak, and the average recovery has been 148.3%.

Consequently, it means all the past falls made a comeback to its previous peak and more in a 3-year
period. Hence, the probability of a bounce back to its previous level this time as well is high.

Almost all the falls before the recent one (COVID -19) has been at the back of significant rallies. On
average, a 3-year return before the markets started to fall, was 227.8 %. However, the 3-year return
before the recent fall due to COVID-19 is only 54 %.

Therefore, the current fall is not on the back of a huge rally but an event – COVID19 and hence the
probability of bounce back in the next 3 years is high.

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