What If the Stock Market Never Recovers?

A new paper examines 3 possible recovery scenarios


Some optimists say they are noticing signs of spring in the midst of our collective economic gloom. But no one is entirely sure what the pattern of economic recovery will look like. A new Urban Institute analysis released yesterday tested out 3 possible stock market recovery scenarios. If you invested $100 in the S&P 500 in 2007, before the 42 percent market decline, and don’t touch it until 2017, here’s how the researchers project your money will fare under each one.

Full recovery. First, let’s be optimistic for a moment and assume that the stock market fully recovers over 10 years. Getting equity values back up to where they would be if there had never been a stock market crash would require an annual real growth rate of 12.8 percent between 2009 and 2017, the Urban Institute calculated. If this happens, the $100 investment in equities in 2007 will be worth $171 in 2017, a 71 percent increase.

Partial recovery. A second possible scenario the Urban Institute considered is a 9.6 percent annual growth rate in equity values between 2009 and 2017. Under this scenario your $100 investment in stocks in 2007, which dropped to $58 in 2008, would be worth $132 in 2017.

No recovery. The no recovery scenario assumes that the stock market does not rebound, but instead resumes a growth rate of 5.5 percent after 2008 (6.5 percent less a 1 percent administrative fee). The projected value of your $100 invested in the S&P 500 in 2007 with reinvested dividends, less administrative fees, is only $94 in 2017, according to Urban Institute calculations. After not touching your money for a decade, it will only be worth about 94 percent of its pre-crash 2007 level and about 55 percent of what it likely would have been if the market had not crashed.

Tell us, which of these scenarios do you think is most likely to occur?