This short post provides an updated and revised version of a March 2012 post I wrote about how low the stock market can go.
We must remember that the stock market is risky and can experience extended downturns for long periods of time. To get a sense of this, I’ve tallied up all the cases of stock market drops greater than 50% in inflation-adjusted terms for the 20 countries included in the Dimson, Marsh, Staunton Global Returns Dataset. The final entry in the table is for a GDP-weighted “world” portfolio diversified across these 20 countries. These calculations are based on annual data, and the drawdowns from peak to trough may be even bigger with monthly data, had that data been available. The data provides total market returns, which includes reinvested dividends. Though World War I and II account for some of these significant market drops, there are still plenty of other examples from more peaceful times.
The table shows the country name, years (beginning of the first listed year to end of the second listed year), and the percentage drop in real terms for the stock market over that period. I also provide the year that the real stock market value would again exceed the level prior to the market drop, as well as the number of years it took for this to happen.