It’s tough to make predictions, especially about the future.

– Yogi Berra

Almost 10 years after the 2009 stock market low, many investors are wondering whether another bear market is around the corner. Unfortunately, no one can predict the exact timing of a bear market. This being said, if you’re an investor with long-term goals, it’s in your best interest to adopt a strategic framework to guide your investment choices. Understanding how market cycles work is part of this framework.


Corrections, crashes and bear markets

A bear market is characterized by an extended price decline of 20% or more following a stock market index peak. It’s not the same as a market correction, which corresponds to a smaller decline of 10% to 20%. A stock market crash is equivalent to a sudden bear market, with prices plummeting in the space of a few days or even hours. Of course, there’s room for interpretation. For example, the 2008-2009 bear market was fairly brief, with most of the losses concentrated between September 2008 and mid-March 2009, which made it seem like a crash. Generally speaking, corrections are fairly tolerable. A crash, however, knocks the wind out of investors. A bear market nibbles away at their patience, especially that of people who have just begun to invest and have yet to benefit from market upturns.


Bull markets and market cycles

A bull market starts when a bear market bottoms out, and ends at the next summit. A bear market plus a bull market equals a full market cycle. Seeing that life expectancy in developed countries is over 80, you will likely live through several of these cycles during your life as an investor. But how many?


Average length of a market cycle

I’ve compiled some statistics about market cycles since 1970. In the United States, bull markets last an average of 9 ½ years (113 months), and bear markets last an average of less than 1 ½  year (33 months). The comparable data for Canada and developed international markets are shown below in Table 1. As you can see, cycles have been shorter here than in the U.S. Beware of reading too much into these figures: 48 years doesn’t generate a lot of data from the statistical viewpoint. But there’s good news: bull markets last much longer than bear markets.

Table 1: Average length (in months) of stock market cycles, 1970 to 2017

Bull market Bear market Full cycle Number of full cycles since 1970
Canada 63 11 74 7
U.S. 113 33 146 4
International 82 18 100 5
Source: PWL Capital


Returns during market cycles

The next logical question is: How much do investors earn or lose during the different market phases? Table 2 shows average market returns, including capital gains and dividends. In Canada, for example, bull markets generated an average of 164% while bear markets cost investors 33%, for an average cumulative return of 81% over a full cycle. Table 2 also shows the corresponding analyses for U.S. and international markets. You’ll note that returns are much higher than in Canada. Beware — appearances can be misleading! The Canadian market has gone through seven full cycles since 1970, compared with just four in the United States and five for international markets. As market cycles are more frequent and shorter in Canada, it is normal that cumulative returns are lower.

Table 2: Market cycle average cumulative returns, 1970 to 2018

Bull market Bear market Full cycle
Canada 164% -33% 81%
U.S. 640% -37% 353%
International 289% -40% 213%
Source: PWL Capital


Investing isn’t a bed of roses!

So far, the market cycle math seems to be tilted in investors’ favour. Bull markets last much longer than bear markets, and net returns for a full cycle are substantial. So why do veteran investors sometimes have mixed feelings about their experience in the stock market? It’s probably because bear markets cause much more damage that one would think at first glance. Take the example of someone who invested $100 in U.S. equities at the market peak in 2007 — followed immediately by one of the most severe bear markets in history, with a decline of 50%. When the market bottomed out, our investor’s portfolio was worth only $50. To recoup her losses, she needed a 100% return! It’s the phenomenon of asymmetrical returns: you need an even higher yield just to recover your losses. And the bigger the losses, the harder it is to recover them, as shown in Table 3.

Table 3: Gains needed to recoup losses

Loss Gain needed to recoup loss Difference
-10% 11% 1%
-20% 25% 5%
-30% 43% 13%
-40% 67% 27%
-50% 100% 50%
Source: PWL Capital


Market cycles and your portfolio strategy

Our analysis of stock market cycles over the past 48 years shows that bull markets last considerably longer than bear markets. For a full market cycle, made up of a bear market followed by a bull market, the cumulative return often exceeds 100%. Some market cycles can be as short as three or four years, but others can be spread over 10 to 12 years. The fact that the U.S. stock market has been climbing for a decade has no predictive value. Finally, bear markets significantly reduce the value of stock market investments, and recouping your losses can be a long-term project. For the record, holders of U.S. equities had to wait until 2013 for their investments to return to where they were prior to the 2008-2009 financial crisis.

Based on all of this, I suggest the following elements for your investment strategy:

  • To benefit from market returns, perseverance is essential. You need a strategy that is simple and easy to follow. Sometimes, you also need to ignore certain factors that can trigger emotions and convince you to abort your strategy, such as market news or the famous brother-in-law who’s a self-taught stock market wiz.
  • Bear markets tend to be worldwide, but they aren’t 100% coordinated. By diversifying your equity portfolio internationally, you have a good chance of mitigating your losses and, once the market turns around, recouping them faster.
  • At the end of the day, the most effective way to reduce portfolio losses during bear markets is to hold a good percentage of bonds, as they most often generate positive yields. This is illustrated by Table 4, which shows Canadian bond yields during the six S&P/TSX bear markets since 1980.


Table 4: Canadian bond yields during bear markets since 1980

Short-term Bonds Total Market Bonds
July 1981 to June 1982 14.6% 11.3%
July to November 1987 2.2% 0.1%
January to October 1990 7.3% 2.5%
May to August 1998 0.3% -0.1%
September 2000 to September 2002 17.7% 18.5%
June 2008 to February 2009 5.9% 3.8%
Source: PWL Capital