This has been a tough year for investors with both broad market equities and bonds seeing negative year-to-date performance. Volatility in stock markets has been prevalent in 2022 as the world has reacted to geopolitical conflicts, sustained higher inflation, and tried to anticipate the interest rate path central bankers would take to try and help curb inflation. 

The thing investors usually hear when markets are declining is to “stay the course” or “be patient.” While this advice may not seem helpful as emotions take over our thinking, it often is the best thing you can do. The long-term data from stock markets shows that patience pays off. Let’s review what history can show us about bear market recoveries.

Historical recovery from bear markets

When we enter a bear market, defined as a drop of 20 per cent or more in a market index, such as the S&P/TSX Composite Index or S&P 500, the natural question is often “when will this all be over.” Nobody knows with certainty when the volatility will subside and if we will enter into a recession. The only thing we know is that it will eventually end and performance will recover for most bonds and equities. 

The data below might offer some comfort as it shows how markets have recovered in the past. 

For each bear market period, the chart outlines the date markets hit their peak (market high) and trough (market bottom), along with the percentage drawdown that occurred between the peak and trough. The last two columns show when a new peak was reached and how many days it took the markets to get to that new peak from the previous low. While there are obvious outliers that occurred, in general, markets went on to hit new highs within a couple of years.

Investing examples from the 2008 bear market

As some investors today consider moving investments into cash (GICs), we have the gift of hindsight in looking at some scenarios coming out of the last bear market in 2008/09.  We will use each Compass Portfolio’s total return index value for all examples. 

October 2008 financial crisis

October was likely the biggest period of uncertainty during the 2008 financial crisis. At the time, two major financial institutions, Lehman Brothers and Washington Mutual (Wamu), had collapsed, a global central bank effort had just been unveiled and several bailouts had been approved. 

This was peak panic for most investors, and rightfully so as things looked pretty grim. However, if we look at the table below, all Compass Portfolios, from our most conservative on the top to our all-equity portfolio on the bottom, offered far more than a GIC or cash return. We can also see that the equity-heavy portfolios on the right, the ones that were already down 35% at the start of our observation period, ended up performing the best.  

During the time period beginning October 2008, GICs for a one-year term would have been priced to earn around 4%.

March 2009 financial crises bottom

In March 2009, we continued to see equity markets sell off as poor economic data poured in. Markets bottomed on March 9 of that year, the lowest stock market point during the 2008/09 financial crises. 

However, looking at the below table, from March 9, 2009 to March 9, 2010, all Compass Portfolios rebounded with our Compass Conservative series A (highest weight to bonds) up 22%. A one-year GIC at this time would have paid around 2%.

With perfect hindsight and our emotions off the table, we can see that the best outcome to the last major bear market scenarios was staying invested. Had an investor sold their portfolio to move to cash, it would have meant leaving wealth on the table in the form of strong returns. 

In this one-year scenario from the market bottom to a year later, if an investor had moved to cash/GICs as opposed to continuing to hold the Compass Balanced A series, they would have $164,000 less in their investment portfolio today (based on $500,000 invested and not accounting for any taxes paid on the growth.) 

If we take things a step further and review the previous market high in each Compass Portfolio prior to the March bottom, we can get a sense of what that drawdown looked like and how long it took the portfolio to hit a value above the previous peak. This highlights an extreme outcome of investing on the exact day of the market high in June 2008, and the days it would have taken to fully recover based on the total return index values. 

Naturally the more equity-heavy portfolios did take longer to fully recover from the market bottom in March 2009, but all portfolios went on to hit new highs about 1.5 years after hitting a market bottom. Investing during that drawdown period would have had the potential to increase the forward returns as well. 

What happened in 2020

Following the great financial crisis of 2008/2009, global stock markets experienced significant growth. From the March 2009 bottom of the financial crisis to March 16, 2020, the S&P 500 experienced a total return of 344%, or 14.5% per year in US dollar terms.¹ However, the path to achieving those returns wasn’t always smooth, as there were 25 drawdowns of 5% or more during that same time period from March 2009 to March 2020. Those represented 25 different opportunities for an investor to get nervous and question their long-term investing strategy.

Early in the COVID-19 pandemic, stock markets had one of their swiftest drawdowns as investors reacted emotionally to the fear of the unknown, followed by one of the fastest recoveries. The recovery was unique as governments acted almost immediately to send relief cheques to qualified individuals as the world went into a lockdown period. 

Final thoughts

With both bond and equity prices falling, there is an opportunity for the patient investor who remains invested. Bond yields, on a forward looking basis, are the highest they have been in decades, and the return potential on wealth creating companies is also strong, given the depressed prices. It is hard to separate the noise from the news in times like this, and that is where a trusted asset manager can add value. ATB Investment Management Inc., has nearly a decade of managing portfolios over multiple market cycles. We have been through this before and we will guide our unitholders through this downtown in the markets as well.