Canadian stock markets have now entered the 11th bear market since 1969, as prices have fallen more than 20% from recent highs. What can we learn from these downward trends? What was the average decline during past bear markets and what happened afterwards?

The risk of investing in the stock market can easily be underestimated, especially during a prolonged upward cycle. Financial crises are reminders that even the most financially sound businesses might see their share prices tumble.

However, having a diversified portfolio and staying true to your investor profile can help keep you from making hasty decisions and selling investments at the worst possible time.

Examining past bear markets and the subsequent recoveries can also help you avoid making costly mistakes. The following table lists the most recent bear markets and the time it took for prices to rally to their previous highs.

Recent bear markets with declines of more than 20% in the S&P/TSX Composite Index

Recent bear markets with declines of more than 20% in the S&P/TSX Composite Index
EVENTBEAR MARKET PERIODDECLINE (FROM THE PREVIOUS HIGH TO THE BOTTOM)TIME TO RETURN TO THE PREVIOUS HIGHPERFORMANCE IN THE YEAR AFTER HITTING THE BOTTOMPERFORMANCE DURING THE STOCK MARKET RECOVERY
Vietnam War05/1969 - 05/1970-29%2 years25%68% over 3 years
(16%/year)
Oil Embargo10/1973 - 12/1974-37%4 years14%182% over 6 years
(19%/year)
2nd oil shock and the fight against inflation11/1980 - 07/1982-44%1 year84%205% over 5 years
(24%/year)
Black Monday October 1987 crash08/1987 - 10/1987-31%2 years*20%42% over 2 years
(18%/year)
Recession and the Gulf War10/1989 - 10/1990-25%3 years14%150% over 8 years
(13%/year)
Failure of the LTCM hedge fund and the emerging markets crisis04/1998 - 10/1998-32 %1 year32%113% over 2 years
(49%/year)
Dot-com bubble 09/2000 - 10/2002-50%3 years33%165 % over 6 years
(19 %/year)
Housing bubble and financial crisis06/2008 - 03/2009-50%5 years58%89 % over 2 years
(36 %/year)
Sovereign debt crisis (euro area)04/2011 - 10/2011-22%2 years11%40% over 3 years
(12 %/year)
Oil price plunge09/2014 - 01/2016-24%1 year30%50% over 4 years
(11%/year)
Average-34%2.4 years32%117% over 4 years
(21%/year)

Assumptions: DividendsDividends are the portion of the earnings, after taxes, that a corporation distributes to shareholders in proportion to their holdings. paid were not taken into account. The “event” column is a simplification of actual events. Daily data were used. Source of data used to prepare the table: Thomson Reuters.

* Exceptionally, the time indicated is two years despite the fact that, at that point, the index had fallen again during the subsequent crisis without having reached the previous high. The index would have returned to its high after two years if dividends had been taken into account.


Conclusion

A stock market crisis can be a stressful event. However, if the past is any indication, investors who keep calm and ride out the downturn instead of panicking and selling at what would be the worst time tend to be rewarded during the following upturns.