The S&P 500 SPX could beat inflation by 8% over the next 12 months. An analysis of the US stock market reaction to past banking panics shows that there is a cheery prospect. In the immediate aftermath of the past crises, stocks almost always recovered quickly. The market was well above where it stood before the crisis erupted, on average a year later.
According to a database compiled by Matthew Baron from Cornell University, Emil Verner of MIT and Wei Ziong, I focused on banking panics in the U.S. since 1870. Within two months of the panic onset, the stock market's post-panic low was hit. In an average of just five months, the S&P 500's real return index was higher than where it was prior to the panic s onset. On average, the index was 8.0% higher at the one-year anniversary of the panics.
If the stock market follows a similar script in the wake of the current banking crisis, the S&P 500 will hit a low sometime this April or May and then rally strongly, eclipsing its early-March level by the end of the summer, and by March 2024, on a double-digit gain over where it stood recently. The average one-year post-panic return of 8% is seen as a result of the nominal gain, see accompanying chart. These averages gloss over a lot of variation from panic to panic. The longest recovery time for a panic since 1870 was for the one that occurred most recently in September 2008. It took the S&P 500 six months to reach its low, and more than an additional year for the S&P 500 to be higher than where it was before the panic s onset.
You shouldn't be surprised by the overall averages. The stock market is typical reaction to economic and geopolitical crises, not just bank panics, as I wrote before.
From an investment point of view, the worst thing you can do is to sell into a panic. Odds are that you ll get highly unfavorable outcomes by doing that.
Unless you were lucky enough to get out of stocks before the SVB -- SIVB, and Credit Suisse CS panic, the best course of action is to hold on for the anticipated recovery. In not too many months, history suggests that you will be glad you did.
Mark Hulbert is a regular contributor to MarketWatch. He can be reached at mark hulbertratings.com
The banking system has finally been hit by the end of the bubble. Credit Suisse and SVB may be the first of many shocks.
Amazon didn't make money for a decade, but those losses weren't even close to what the startup companies and their investors are facing now.