% return in C$
Canada: MSCI Canada; U.S.: MSCI USA; International markets: MSCI EAFE; Emerging markets: MSCI Emerging Markets. Source: Morningstar Direct
Fixed income and currency
% return in C$
Canada investment grade: Bloomberg Barclays Canada Aggregate; Global investment grade: Bloomberg Barclays Global Aggregate; U.S. high yield: Bloomberg Barclays U.S. High Yield. Source: Morningstar Direct.
Staying invested is about time in the market, not timing the market
The technical definition of a bear market is a drawdown of at least 20% in a stock market index from its most recent high. The S&P 500 Index briefly entered bear market territory on May 20, 2022, before reversing course. The Nasdaq Index also entered bear market territory in recent months. Of note, while bear markets are synonymous with strongly negative sentiment around equities, it is not uncommon for the market to see significant drawdowns on its way toward generating longer-term gains.
Analyzing the history of the U.S. stock market, we see four major market bottoms prior to March 2020—1932 (Great Depression), 1974 (energy crisis), 2003 (dotcom bubble), and 2009 (Global Financial Crisis)—that resulted in protracted bear markets. On the journey toward these troughs from the prior market peak, in each case there were at least three rallies of 10% magnitude. The four bear markets leading to these market bottoms cumulatively saw 18 rallies of over 10%. In short, bear markets rallies tend to be a feature, not a defect, of equity investing.
An additional salient point is that some of the best days in equities tend to come during periods of elevated volatility, and when broader sentiment is negative. For example, in the history of the S&P 500 Index, 19 out of the 20 largest daily gains have come around bear market periods (1929–1933, 1987, 2008, 2020). Notably, these outlier days tend to cluster together and occur during periods of elevated volatility.
The key lesson from this is an old adage, that long-term investors benefit from “time in the market, and not from timing the market.” A desire to avoid the worst days also comes with missing out on the best days. Missing out on the best days in turn significantly reduces long-term returns for investors. Expecting multiple market rallies as a typical feature of bear markets and staying invested throughout the process sets up investors for considerable potential for long-term investment success. The chart below illustrates the growth over time of equity market returns, despite multiple market pullbacks
S&P 500 Index climbs despite pullbacks