The turnaround is stunning. Emerging market stocks had their worst year on record in 2008 (down 53%) and their best year on record in 2009 (up 79%). High yield corporate bonds had their worst year on record in 2008 (down 26%) and their best year on record in 2009 (up 58%).
Compared with 13 bear market recoveries since 1929, the 2009 stock market rebound is one of the most robust ever. The S&P 500’s 65% rise from March 9 to December 31, 2009, is more than a third higher than the average 46% rebound in the first year of new bull markets. The 2009 rally even beats the average two-year return of 57% in prior bull market recoveries.
Despite the 2009 rally, the S&P 500 remains 29% below its level prior to the start of the bear market. That is similar to prior large bear markets. A year after the 1937-1942 downturn, the S&P 500 was still 39% below its pre-crash high. A year after the 1973-74 bear market, the S&P was down 29% from its prior high.
No one knows what will happen in 2010 and past performance does not guarantee future results. But historically, in 12 out of 13 bear-bull cycles, gains continued during the second year of the recovery, just at a slower pace. Let’s hope so.