It’s Different This Time, Again

So far in my career I have experienced 6 bear markets and 4 (probably going on 5) recessions. What has this taught me? That while every time is different, every time there are similarities too. In 2022 two different things are the Russian invasion of Ukraine and the cryptocurrency bust. The things we have seen before are high inflation, growth stocks breaking down, and central banks raising interest rates. Watching your portfolio go down during a bear market is stressful. But looking back over the last 100 years, as a group the businesses that constitute the stock markets have been able to adapt and move through the tough times and return to generating profits for their investors.

Each Bear Market is Different

In my May 2022 blog Barely a Bear I showed the total decline and duration of each bear market since 1929. As a reminder, as measured by the price index for the S&P 500 in US$, the median bear market declined 37% and lasted 17 months. So far in 2022, the bear market has lasted 6 months and the maximum decline was 25% in June.

But what were the main factors behind each bear market? Table 1 lists the top ones. From my experience of the last six bear markets, I can verify that each time there were some unique events that were the focus of the markets and the media. Going back to 1929, you can see that this has been the case for all bear markets. So, this time is different.

Table 1

Source: J.P. Morgan Asset Management, Wayfairer Capital

Yet Table 1 also shows the similarities as well. In the 2022 bear market we see central banks raising rates, inflation running too hot, speculative investments crashing, war, an oil price shock, a tech bubble, and recession fears. None of these events are new; they have all happened before. So, this time isn’t so different after all.

Cycles Are Normal

Let’s look at the history of bear markets from another perspective. Chart 1 shows the price of the S&P 500 since 1927. The scale is in logarithmic terms, which means that when you compare one point on the black line to another point it shows the percentage change over time, not the number of index points. All the bear markets from Table 1 are highlighted in the bottom half of the chart by the red shading. All bull markets are highlighted by the green shading. Finally, I also show the recessions in the top half of the chart with the gray shading.

Chart 1

Source data: Yahoo Finance, National Bureau of Economic Research, J.P. Morgan Asset Management

Since 1927 there have been 15 bull markets, 15 bear markets, and 15 recessions[1]. It is interesting (at least to me!) that not all bear markets have resulted in recessions, and not all recessions have resulted in bear markets. The key message from Chart 1 is that history keeps repeating itself. On average, periods of economic growth are longer than recessions, and bull markets are longer than bear markets.

Volatility Is Normal

In Chart 2 I have adapted a J.P. Morgan Asset Management chart on the U.S. stock market to the Canadian stock market. There is over 40 years of data for the S&P/TSX Composite Total Return Index available. As shown by the green bars, it is normal to have many more years with annual returns that are positive than negative. The red dots show the maximum loss in the S&P/TSX in any year, as measured by the highest level vs. the lowest level during that year. You can see how volatility is normal. Every year, whether the annual return was positive or negative, shows a loss at some point. In fact, as you eyeball the red dots you can see that on average most years show a 10% loss during the year.

Chart 2

Source data: Investing.com

The Power Of Staying Invested

Many of you will have seen a chart similar to Chart 3 before, but it is worth revisiting. The chart shows that $100,000 invested in the S&P TSX in 1980 would have grown to $3.6 million by July 2022. But if you try to time the market, getting out when you are nervous and waiting to get back in once you think it is safe, I can guarantee that you will miss some of the best up days in the market. I have never come across anyone who can consistently get those calls right.

Chart 3

Source data: Investing.com

Missing just a handful of the best days has an enormous impact on the growth of your money. If you missed the 5 best days over more than 40 years (0.03% of all the days) your money grew to $2.3 million, or 37% less. Missing the 10 best days (0.06% of all days) resulted in $1.7 million, or 53% less!

Portfolio Implications

From Chart 1 you saw that cycles are normal. The average bull market is longer than the average bear market. And the stock market’s general trend is up over multi-year periods despite recessions, wars, inflation, and the unwinding of speculative excesses. In Chart 2 you saw how volatility is normal, that even positive return years experience losses at some point. And in Chart 3 you saw the cost of trying to time the market. Missing the tiny fraction of time that the stock market posts its best daily returns, which typically comes in the rebound from a bear market, substantially reduces long term returns.

If you genuinely believe that this time is different, that the economic, market, business and political foundations are all crumbling and will result in a massive, sustained decline in stock markets, then I can see why you would want to avoid stocks. I would note that under that scenario most other assets such as real estate and alternative assets will be significantly down as well. Also, how safe would GIC’s be given the health of financial institutions under that scenario?

I think that this time isn’t that different, and that the economic and institutional foundations will hold and businesses and markets will adapt once again. But that doesn’t mean that the stock market recovery will be quick and returns will be massive. The starting point for the 2022 bear market, primarily for the U.S. stock market, was a high valuation level as measured by the market’s price to earnings ratio. Given the starting level, I don’t expect double digit annualized returns over the next ten years (the horizon I use for asset allocation). It is more likely to be mid single digit returns for U.S. stocks and mid to high single digit returns in other stock markets.

Invest wisely,

Dave Schaffner, CFA

Principal, Wayfairer Capital Management Ltd.

[1] I have not shown a recession in 2022, even though we have had two consecutive quarters of negative GDP in the U.S., which is considered a technical recession. A recession is “official” once the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee makes a decision based on a number of criteria. According to the NBER,  a recession “involves a significant decline in economic activity that is spread among the economy and lasts more than a few months.” They consider measures such as personal income, personal consumption, employment, retail sales, and industrial production. There is no fixed rule on what measures they look at or how they weight the measures.