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How Fast Do Markets Recover From a Swoon?

Timothy Strauts

Tim Strauts: The stock market has experienced incredible volatility recently. From Aug. 19-25, the Dow Jones Industrial Average declined 10.5%. Declines of this magnitude in only five trading days are rare. Today's chart looks at periods since 1976 in which the market fell more than 10% in five trading days. It has only happened five times, and all the events are noteworthy.

The 1987 Black Monday crash and the 2008 financial crisis had the largest declines, at 29.6% and 18.2%. These falls were part of a broader bear market. The other three occurrences--the 1998 Russia default, the Sept. 11, 2001 terrorist attacks, and the 2011 U.S. debt-rating downgrade--were caused by an event that shocked the market. The declines weren't as extreme, and the market recovered more quickly, as we can see in the next chart. It took between 40 and 62 days to recover from the event-based declines.

The U.S. economy looks healthy, with growth of 3.7% in the second quarter. With a U.S. recession unlikely in the near term, it's more likely that the market reaction to China was overblown, and the U.S. market will recover in a similar time frame to the other event-based declines.