Bears Come Knocking

December 13, 2019 • The Big Picture

By Richard J. Wylie, CFA

Vice-President, Investment Strategy, Assante Wealth Management

Not surprisingly, the financial press continues to dwell on the length of the current positive run in U.S. equities. By any standard, the current bull market1 , which began on March 9, 2009, amid the ashes of the financial crisis, is one of the longest of the modern era. Now moving well into its 11th year, there is growing concern over which kind of bear will finally show up to end the current expansionary market phase. Small bears, while certainly unsettling, do less damage, with recovery periods that are relatively brief. Conversely, the largest bears, such as the one that accompanied the 2008-09 financial crisis have, historically, taken a far bigger bite out of investment portfolios and have seen recovery times that stretch into several years. Well-planned strategies can lessen the blow of a bear market, even under the worst market circumstances. Having a diversified portfolio and professional advice provides the best defence when whichever bear it is finally comes knocking at the door.

The U.S. story

As can be seen in the accompanying table, the U.S. has had 11 bear markets since the Second World War. Given the length of time that has passed since the U.S. last experienced a bear market, which ended in March 2009, it is only natural that investors’ strongest recollections are of this most recent bear. That particular market decline proved to be extreme in every sense, prompting comparisons to the market crash of the Depression era. Starting on October 9, 2007, the market declined 56.8% over a 517- day period. The recovery from the March 9, 2009 bottom took more than four years, as the gap was finally closed on March 28, 2013.

BP 1 Dec. 13 2019

Source: Yardeni Research Inc, Bloomberg, Standard & Poor’s, Yahoo! Finance, Stooq

Given the extended length of the current bull market, it may be easy to forget that bear markets are also a normal part of the market cycle. For the purposes of these writings, small bear markets range from declines of 20.0% to 29.9%. Medium-sized bear markets range from declines of 30.0% to 39.9% and large bear markets result in declines of 40% or more. By ranking the U.S. bear markets into these three categories, a pattern emerges. As shown in the table below, most (six) of the bear markets have been small, with two medium-sized bears and three large bears. Compared to small bears, medium sized bear markets have occurred less often, but they have taken about the same amount of time to bottom out, an average of between 10 and 11 months. However, the recovery from a medium bear takes a bit longer. The average recovery time for a small bear has been 13 months, while a medium bear has taken seven and a half months longer. The large bears have not only extracted a larger toll when they occurred, but they have taken longer to bottom and have also required significantly more time for the market to bounce back. On average, these three large bears consumed almost two years from peak to trough. The recovery time, again on average, has taken closer to six years.

BP dec 2 2019

Understandably, given the time it takes to recover from one of these bears, the timing of these events can be problematic for individuals, particularly if they occur just before retirement or early in the postretirement period. Fundamental investment thinking (and basic mathematics) suggests that the sequence of returns does not impact the final result. As an example, three hypothetical annual returns of +2.2%, +5.6% and -3.4% applied to an original investment of $100 will end up producing the same final result of $104.25. This is true, regardless of the order of their occurrence. The table below illustrates the six possible orders of these three years of returns, all of which produce the same final result. However, if one is in retirement or nearing retirement, the sequence of returns is significant and the emergence of an inopportune bear market can have a detrimental impact.

BP 3 dec 2019

The graph below illustrates the actual index declines and gains over the market cycles experienced. Not surprisingly, the market has advanced more than it has declined by a significant margin and recent record highs in the S&P 500 continue to reaffirm this longest of trends.

BP 4 Dec 2019

However, even though the market advances appear to dramatically overshadow the bear retracements, it is important to keep in mind that the percentage gain needed to produce a recovery from a bear decline is actually larger. The table below illustrates this apparent incongruity. At the end of an average small bear decline of 24.5%, the index would have to climb 32.5% to recover. Similarly, medium bear losses of 34.8% and large bear declines of 51.4% would require index gains of 53.3% and 105.7%, respectively, in order to achieve a recovery.

BP 5 Dec 2019

2 Reliable data for the S&P/TSX and its predecessor indices is available only back to 1956. Daily data is available only from 1977


Given the closely intertwined economies, it comes as no surprise that many of the historic movements in the U.S. equity market have been broadly mirrored in Canada2 . Most recently, however, unlike the U.S., the Canadian market has had, since the financial crisis in 2009, two separate, small bear markets (declines of 21.7% and 24.4%). However, even with the interruption of these two bear markets and the subsequent recoveries, Canadian investors remain concerned that the domestic market will be dragged down along with its U.S. counterpart, when that bear eventually materializes.

BP 6 Dec 2019

Breaking the Canadian bear markets down into the three categories used above, some similarities emerge. However, there are also some differences. As shown in the table below, most (seven) of the bear markets have been small, with four medium-sized bears and three large bears. Compared to small bears, medium-sized bear markets have occurred less often, but they have taken about the same amount of time to move from peak to trough. In Canada, the bottom for a small or medium bear occurred after an average of between nine and 10 months. The recovery times are different than those of their U.S. counterparts as the average recovery time for a small bear has been 18 months, while a medium bear has taken 42½ months. This marginally longer that the average recovery from a large bear (41½ months).

BP 7 Dec 2019

Once again the graph below reveals that, like the U.S. equity market, the long-term trend is higher. New all-time highs were also recorded by the Canadian equity market in November. In Canada, the end of an average small bear decline of 24.4% has required that the index rise 32.2% to reach a recovery. Average medium bear losses of 32.4% and large bear declines of 45.5% have required index gains of 47.9% and 83.6%, respectively, in order to achieve a recovery.

BP 8 Dec 2019


  • Even though the U.S. equity market has seen an extended period of gains, bulls and bears are part of the normal cycles of the market. The current bull market will eventually end and be relegated to history.
  • Even though Canada has witnessed two bear markets during the current U.S. expansionary phase, the intertwined relationship between the two countries and Canada’s greater dependence on trade raises concerns that the Canadian equity market will follow when the U.S. bear finally does show up.
  • The size and timing of bear markets is unpredictable. This is of greater concern to those near or at retirement. Taking advantage of professional advice can help protect hard-fought portfolio gains and limit the impact when the bear eventually emerges.







The information contained herein consists of general economic information and/or information as to the historical performance of securities, is provided solely for informational and educational purposes and is not to be construed as advice in respect of securities or as to the investing in or the buying or selling of securities, whether expressed or implied. Neither Assante Wealth Management (Canada) Ltd. nor its affiliates, or their respective officers, directors, employees or advisors are responsible in any way for any damages or losses of any kind whatsoever in respect of the use of this report or the material herein. This report may not be reproduced, in whole or in part, in any manner whatsoever, without the prior written permission of Assante. Copyright © 2019 Assante Wealth Management (Canada) Ltd. All rights reserved.

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