What History Tells Us About How Markets Recover

First, the good news: the economy will almost certainly recover after the pandemic.

Second, the even better news: if history is repeated, the economy will come back even stronger.

Third, the (somewhat) bad news: no one knows exactly how long the recovery will take—but two to three years is a pretty safe guess.

In late March Larry Fink, the CEO of BlackRock, the world’s largest asset management firm, told shareholders: “The world will get through this crisis. The economy will recover. And for those investors who keep their eyes not on the shaky ground at our feet, but on the horizon ahead, there are tremendous opportunities to be had in today’s markets.″

Fink wasn’t just being optimistic. There’s great historical precedent for his predictions.

A recent Harvard University study considered the effects of the 1918 Spanish flu pandemic on the gross domestic product (GDP) of 42 nations. The researchers found that, though the 1918 flu was responsible for an additional 6% decline in global GDP, those effects were reversed by 1921.

By definition, an economic recession must last at least six months, where a bear market—which is generally thought of as a decline of 20% or more from recent highs—could last only a matter of days. So, while the U.S. economy is certainly in a bear market, the current situation is not yet a recession.

Still, what we’ve seen after previous recessions can help us predict what will happen after this pandemic—and that’s great news. The U.S. economy has suffered through 12 different recessions since World War II. Most of these recessions have lasted just 10 months, with subsequent periods of expansion that lasted an average of 57 months.

Still, it’s easy to understand why the future may bleak right now. For many Americans, the only recession that impacted them, or the only one they remember impacting them, was the Great Recession of 2008, which lasted an agonizing 18 months. The 2008 recession was the longest and most severe economic downturn in the U.S. since the Great Depression, with unemployment jumping as high as 10 percent and GDP shrinking by 4.3 percent. Understandably, many worry that a recession means a repeat of 2008.

But, with history as a guide, it’s far more likely that the economic downturn that follows the pandemic will last less than a year and then be followed by a period of growth. In other words, as Fink said, there will be tremendous opportunities for those who keep their eyes on the horizon, and not on the shaky ground.