Analysts suggest that it may not be a good idea to panic sell following the market, because the best days often come right after the worst ones.
Analysts at Bank of America said that it could take six months for global stock markets to recover from the recent sharp decline.
The unwinding of yen carry trades (investors borrowing yen at low rates and investing in other higher-yielding markets), combined with lower-than-expected US jobs data, caused the MSCI AC World index, which tracks thousands of stocks across developed and emerging market economies, to fall 6.4% in three days.
Looking at historical trends, analysts at Bank of America found that over the past 34 years, the MSCI AC World index has experienced 26 similar three-day periods with declines ranging from 6% to 7%. On average, it took six months for the stock market to recover during these 26 events.
In a report on Monday, the analysts wrote that after such a sell-off, returns were positive 73% of the time over the next 12 months, with the MSCI AC World index posting an average return of 17.9% during that period. Stocks in the technology, materials and non-essential consumer sectors often performed the best during this 12-month period.
They said: "Recent stock market sentiment has weakened somewhat, but the improvement in the global earnings cycle and the forthcoming easing cycle provide a long-term positive backdrop for equities."
Although investors were concerned about a possible economic recession last week, some well-known pessimists were not certain that a recession was inevitable. This includes economist Nouriel Roubini, known as the "Doomsday Doctor", who said in an interview last week that while there were signs of economic slowing, there were still some strong factors in the economy.
Even Claudia Sahm, the creator of the well-known recession indicator known as the "Sahm rule," said that although the latest employment report triggered the rule, it is not yet time to panic.
In another report released last Friday, analysts at Bank of America warned investors not to sell stocks in panic as the S&P 500 index has an average of three drops exceeding 5% per year. Since the 1930s, if an investor missed the best 10 trading days each year, his or her long-term rate of return would only be about 73%, while the return rate could reach 25,000% if those days were not missed. The key is to maintain investment.
Analysts wrote: "A panic selling may not be a good idea, because the best days often follow the worst ones."