History Says This Is What Comes Next After a Market Crash and When Stocks Might Recover

With the stock market crashing, investors may be wondering where the market is heading from here and when stocks may recover.

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There have been several market crashes over the past 100 years, so let's look what history has to say.

The COVID-19 market crash (2020)

The most recent market crash happened in March 2020, when the S&P 500 dropped 13.8% in two days on March 11 and 12. The cause of the crash was uncertainty over the COVID-19 pandemic and subsequent lockdowns.

The market would bottom on March 23, with the S&P 500 declining by another 9.8%. The S&P's total decline from peak to trough would be about 34%.

This was a quick yet steep decline, with the market putting in a bottom in just over a month. A fast recovery also followed it, as the Federal Reserve acted quickly slashing interest rates to near zero and launching a quantitative easing program where it bought government bonds and other assets. The S&P returned to its pre-crash highs by mid-August of 2020, as the Fed showed how it can help stocks during a market crash.

The global financial crisis (2008)

Amid the subprime mortgage crisis and the collapse of investment bank Lehman Brothers, the S&P 500 declined by 8.8% on Sept. 29, 2008. It later declined by about 20% the week of Oct. 6. The market would bottom a little over five months later in early March 2009.

After the initial Sept. 29 plunge, the S&P 500 would plummet another 44%. In total, the S&P would lose more than half its value during the bear market. It would take over five years for the market to return to new highs. Once again, the Fed played a huge role in the market's recovery, as it slashed interest rates to near zero percent and initiated a quantitative easing program that included purchases of mortgage-backed securities. The government also reacted with a fiscal stimulus package and injected capital into the banking system and other financial institutions through the Troubled Asset Relief Program (TARP). By the time the market bottomed, stock valuations had fallen quite a bit and were quite attractively priced.

Black Monday (1987)

In the largest single-day decline in the U.S. stock market, the Dow Jones Industrial Average (DJIA), which was the benchmark index at the time, plunged 22.6% on Oct. 19, 1987. The large crash was attributed to stocks being overvalued as well as rampant speculation and the introduction of computer-based trading that would try to hedge portfolio losses by automatically selling futures when stock prices dropped. There was also a lot a leverage and margin debt at the time, and investors started to panic.

The Dow would bounce around before finding a "second bottom" in early December. It would take nearly nearly two years for the Dow to reach new highs. The Fed once again acted quickly by injecting liquidity into the banking system to help stop further damage. However, while these actions helped the market from spiraling, valuations before the crash were high and investor confidence was shaken. As such, the crash essentially acted as a valuation reset for the market after a long bull market, and it took time for stock fundamentals to catch up to its past valuation. for the Dow to reach new highs.

Wall Street crash of 1929 (1929)

In late October, the Dow Jones nosedived about 23% over a two-day period. The crash was largely the result of speculation, high valuations, and investors buying stock on margin. In addition, the crash would kick-start the Great Depression, as banks collapsed and panic set in. Specifically, the Smoot-Hawley Tariff Act would only prolong this difficult period.

The stock market crash, however, was just the beginning of a tough several years for investors. The Dow Jones Industrial Average would decline another 82% before hitting a bottom in July 1932. From peak to trough, the Dow's overall decline was 89%. It would take about 25 years for the market to fully recover.

Image source: Getty Images.

What history says about the current market crash

Throwing out the extreme of the Great Depression, history suggests that after a market crash, stocks should bottom out in just a few months. Following the three modern-day market crashes, the markets all hit their bottoms in under six months, and for two of them, it was less than two months.

A recovery to new highs is a bit more difficult to pin down. Following the COVID-19 crash, the market rallied quickly. Given that it was the government's actions with tariffs and subsequent retaliatory tariffs that caused this most recent stock market crash, it seems like the bear market could be similarly short-lived if there is a change in course with the tariffs.

President Donald Trump has proven to be unpredictable and whether the tariffs last a week or his whole term and beyond is a question mark. He has already paused the tariffs for 90 days for countries other than China.

However, it is this unpredictability and quick decision reversals that make it difficult for companies to take actions. Many companies had previously started shifting their sourcing and manufacturing to other Asian countries such as Vietnam, only to see Trump initially look to hit those countries with huge tariffs as well. Meanwhile, reshoring would take years to accomplish and the U.S. likely doesn't have the workforce to take on these jobs. This likely leaves most companies paralyzed in their actions just waiting to see what may happen next.

The Fed, meanwhile, has played a big role in past market recoveries, but with this crash self inflected by government tariffs, and given the on-and-off nature of them, the central bank has also stayed on the sidelines. The whole lack of clarity and flip-flopping makes this one of the toughest market crashes for anyone to react to and make decisions.

Buy the dip

With history suggesting the market could drift lower over the next couple of months, one of the best strategies investors can deploy is waiting for further small dips and then buying into them. While pinpointing the market's exact low is challenging, gradually allocating funds during market downturns over the next few months should optimize your returns when the market recovers.

Another option is to dollar-cost average into an exchange-traded fund (ETF) such as the Vanguard S&P 500 ETF (NYSEMKT: VOO), which tracks the S&P 500. This could just entail investing a set amount every two weeks into the ETF.

Bull markets typically see their best performance when they rally from the bottom. As such, you'd want to avoid picking a bottom, or you could miss out on the biggest part of the rally.

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Geoffrey Seiler has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.