In the first half of 2022, the S&P 500 Index entered into a bear market prompting some investors to ask: will the Canadian markets follow? As a reminder, a bear market is often defined as a period in which stocks have declined by 20 percent from a previous peak over a period of usually two months or more. So far, the Canadian markets have been comparatively resilient due to a higher composition in resource-related stocks versus the growth and consumer discretionary-heavy S&P 500. Regardless, bear markets are a normal part of the investing cycle. Here are some perspectives on bear markets:
1. Bear markets are much shorter than bull markets.
Since 1970, we have seen an abundance of ups and downs, and yet the S&P/TSX Composite Index (not including dividends reinvested) has returned an average annual return of over 6 percent. The average bull market, of which there have been nine, has lasted almost 61 months, whereas the average bear market, of which there have been eight, has lasted just under 10 months. Equities continue to be one of the best asset classes in which to grow wealth, but this is not without market fluctuations.
The takeaway? Bear markets eventually come to an end, and often more quickly than bull markets.
2. Bear markets: often the good comes with the bad.
A recent analysis done on the S&P 500 Index showed that the biggest up and down days often occur during down market times.¹ Since 1928, there have been 350 trading days when the index was down three percent or worse. There have also been 290 days when it was up three percent or more in a single day. However, more than 90 percent of both volatile days have taken place during a correction of 10 percent or worse. More than 80 percent of those days have taken place during a bear market drawdown of 20 percent or worse.
The takeaway? Both the biggest down and up days tend to take place during periods of market drawdowns. This is one reason why it is important to stay invested. By making rash decisions such as exiting the markets during a market drop, you are likely to miss significant upward moves.
3. What comes after a bear market? It isn’t uncommon to see significant gains.
Here are the five worst bear markets for the S&P 500 Index since 1970 (chart), along with their ensuing one, three and five-year forward returns. Even though it takes a 100 percent gain to make up for a 50 percent loss, the gains were enough to produce overall double-digit returns.
S&P 500 Index Returns After a Bear Market
The takeaway? Even the worst bear markets are followed by significant equity value gains. And history has shown that the periods that follow take prices much higher than their former peaks.
Continue Looking Forward
While periods of market declines never feel good for investors, portfolios have been positioned with the expectation that the equity markets will experience both bull and bear market times — this is a normal part of the investing journey. Continue to look forward to better days ahead.