Traders work on the floor at the New York Stock Exchange in New York, on July 1.Seth Wenig/The Associated Press
Prepare yourself mentally all you want, bear markets still feel awful. This one, perhaps, more than most. So it will pay to keep a few simple rules in mind in the months ahead.
This was the worst first-half of the year for U.S. stocks in more than half a century, with the 21-per-cent drop in the S&P 500 exceeded only three other times dating back to the 1920s.
Throw in the bond market sell-off, and the experience for investors so far in 2022 looks even more dismal. In fact, it was one of the worst six-month stretches ever recorded for the standard 60/40 portfolio mix of stocks and bonds.
To be fair, the main Canadian stock index has not yet reached bear-market territory – its decline sits at 14 per cent from its recent peak. But plenty of individual stocks have reached the bear-market threshold.
Nearly three-quarters of the companies in the S&P/TSX Composite Index are at least 20 per cent off of their 52-week highs. Nearly half are down by 30 per cent or more. And roughly one in nine Canadian stocks is nursing a loss in excess of 50 per cent.
How long will the bear market last?
Buying the bear? Equity demand endured market pain
That’s a lot of pain distributed among the investing masses in Canada, who were able to trade the recent stock market boom with unprecedented ease, through online brokerages giving access to complex, risky strategies and zero-fee trading.
Wherever the retail trade was most frenzied, the reckoning has been its most severe – cryptocurrencies, non-profitable technology, recent initial public offerings, and Shopify Inc. SHOP-T Briefly Canada’s largest public company, Shopify has since seen its stock tank by a punishing 78 per cent.
For many regular investors, living through this bear market means watching their portfolios depreciate day after day, hoping for it to end. But it is precisely these kinds of episodes that sow the seeds of future stock-market returns.
“It pays to ride out this cycle,” said Christine Poole, chief executive officer at GlobeInvest Capital Management. “We’re getting rid of all the excesses.”
Here are a few things every investor should know about bear markets:
They are the price of admission
Similar to how voting gives one the right to complain about government, losing money in a bear market earns an investor the opportunity to fully participate in the recovery, whenever it happens to begin.
One of the reasons timing the market is so rarely successful is that there is a high probability of missing out on a generational buying opportunity.
For example, when stock markets globally bottomed out in March, 2020, after the global pandemic hit, the rally was under way in the blink of an eye. In just three trading days, the S&P/TSX Composite Index was up almost 20 per cent. A month later, those gains stood at 35 per cent.
Missing out on the very first days of a bull market can have dire consequences for long-term returns.
They have numerous head fakes
Some of the greatest single trading days of the year come smack in the middle of stock-market nosedives.
But don’t be fooled. These are bear-market rallies, also known as dead cat bounces, because anything that falls far enough is sure to rebound a certain amount.
One day in early May, the S&P 500 index rose by 3 per cent in one day. The market erased those gains – and then some – the very next day. Other times, the rallies last a bit longer, fuelling optimism that the bottom is in.
This is a textbook bear market pattern, and it’s likely to grind along in a similar fashion for the rest of the year, said Sébastien Mc Mahon, chief strategist at iA Investment Management.
“We don’t expect any further drawdown to be smooth as we will likely see multiple bear market rallies along the way,” he said.
They are aggravated by recessions
The stock market is not the economy. In fact, most bear markets occur in the absence of recessions, and vice versa. But when they coincide, watch out.
An Invesco report found that this sort of bear market, on average, spanned more than 15 months and generated losses of more than 40 per cent.
Unfortunately, the recession signals are building, with the sell-off across the commodity space the latest to hint at a growth shock ahead. That just may be what’s needed to tame inflation, however, and allow central banks to ease off of rate hikes.
“In prior bear markets, the market doesn’t really truly bottom until the Fed stops raising interest rates,” Ms. Poole said.
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