Market

Lesson from past bear markets: Recovery is fastest in first 3 months post bottom

Updated : June 05, 2020 03:27 PM IST

A recent Prabhudas Lilladher report said that in 2008 GFC, the index rose by 78.3% from the bottom in the first 3 months.

Historical data also shows that the market fully recovered within 12 months post hitting the bottom.

There have been six bear markets to date in modern times and the current one has seen the steepest decline since the 2008 global financial crisis (GFC) due to the COVID-19 pandemic. A recent Prabhudas Lilladher report has said that on average, the pace of recovery is swift in the first three months post bottom and then slows down in the next three.

The market has caught a bit of momentum in recent days gaining 28 percent since March lows after plunging 38 percent between January and March. Experts like Kenneth Fisher, founder, executive chairman, Co-CIO at Fisher Investments, ascribe this to markets pre-pricing towards the later part of the next year.

"Markets start skyrocketing while the economy is still getting worse and economic data looks uglier and uglier and in that process. Here it is pre-pricing an eventual return of the stocks," he explained on CNBC-TV18 in a conversation with Ramesh Damani, Member, BSE.

From historical data, the Prabhudas Lilladher report indicated that in 2008 GFC, the index rose by 78.3 percent from the bottom in the first 3 months post the date of a trough and then just 4 percent in the next 3 months.

Image Source: Prabhudas Lilladher

As per the historical data, it has been seen that the market fully recovered within 12 months post hitting bottom, and while no two market cycles are alike, it is too early to predict that a similar pattern will repeat this time too.

The brokerage further went on to say that there were 3 bull traps during GFC in 2008-09 where Nifty 50 rose by 16 percent, 21 percent and 25 percent from the intermediate lows hit in the 15 month period. The market finally bottomed out on 9th March 2009 and the bulls took over thereafter, it said.

Image Source: Prabhudas Lilladher

On a median performance basis, the brokerage pointed out that over the last 6 bear market cycles, the benchmark index (Nifty50) falls 37.3 percent from the peak. A median is a value that separates the highest data point from the lowest data point. It is thought of as the "middle" value of a data set.

Continuing on the brokerage's observation, it's been seen that the index rises 15.4 percent from the bottom in the first 3 months and 52 percent in 12 months, added Prabhudas Lilladher report.