Booms and busts are a normal part of the stock market cycle. While investors are happy to welcome the upswings, the downturns can be a source of emotional turmoil and may even shake their confidence in the markets.  

Here are a few facts that may help to make these cycles more comprehensible and keep them in perspective. 

Three key concepts  

Let’s start with some basic definitions. 

A bull market is a period in which a market index climbs at least 20% above its previous low. This 20% benchmark is symbolic: the index may be rising for many months or years before officially entering bull market territory. Some analysts prefer to define this phase as a period of growth to a new high after a decline of at least 20%. 

A bear market is the opposite: a period in which an index drops by at least 20% compared to its previous peak. This benchmark is also symbolic, and the index may be declining steadily long before it officially becomes a bear market.  

A third, equally important, concept is that of a stock market correction. This refers to a somewhat smaller decline in the stock market, usually at least 10%. If the correction eventually reaches 20%, it becomes a bear market. 

Advantage: bull markets 

How often do bull and bear markets occur? Between 1957 and 2022, the Canadian stock market experienced 10 bull markets and 10 bear markets.  

However, as the following graph shows, bull markets tend to be much longer and show much larger swings than bear markets. More specifically, the average length for bull markets has been 69 months and the average return has been 164%. By contrast, the average length for bear markets has been 11 months and the average decline has been 29%. 

Of course the declines are no less unsettling when they happen, but this puts them into perspective. 

Declines during the year are inevitable 

Do market downturns worry you? Keep in mind that such declines happen every year. The following graph, developed by J.P. Morgan and based on the S&P 500 index in the U.S., paints an eloquent picture. The brown markers show the percentage decrease posted by the index during the year for each of the past 24 years (N.B.: 2024 data dates from August). The blue bars represent the return posted by the index at year-end. Note that in every year the stock market registered a more or less significant downturn, but that didn’t prevent it from ending the period with a return that was positive, or at least less strongly negative.  

If worse comes to worst 

Nonetheless, it would be foolhardy to rule out the possibility of a major crisis that would provoke a long, deep stock market trough. Here again, while past performance is never any guarantee of future performance, a knowledge of the past can help to inform the decision-making required in such circumstances. 

The following graph illustrates the value of a $10,000 investment before the 2008-2009 financial crisis, then when the crisis was at its worst (right when the markets bottomed out), and finally, five years later. As we can see, regardless of whether the investment was in Canadian, U.S. or foreign equities, it had more than recovered its value in five years.  

It’s reassuring to see that the markets were able to recover after a crisis of that magnitude. Even so, when things were at their worst, some investors were tempted to limit their losses by taking their marbles and going home. That’s why experts recommend making an honest assessment of your tolerance for that sort of downturn and building your portfolio accordingly: because getting out of the market at the bottom means not profiting from the rebound when it comes. 

The average return is… an average 

In closing, a useful reminder. In the past 50 years, Canada’s stock market index has generated an average annual return of about 10%. But remember: this is an average, not a typical return that you might expect to see every year. The following graph, using fictitious numbers, reiterates that an average consists of variable data, sometimes strongly positive, sometimes strongly negative. 

To obtain the average annual return that your forecasts are based on, you need to be prepared for returns that may differ greatly from this average in any given year. 

Clearly, history teaches us that we don’t necessarily have to be afraid of falling markets, but we definitely need to be prepared, since they are frequent, inevitable and occasionally serious.  

In the face of this reality, your advisor can help you build a portfolio that truly reflects your risk tolerance, that is, your ability to stay calm when such events occur.