By Sadiq S. Adatia, Chief Investment Officer, Sun Life Global investments
Despite all the dire headlines they generate, deep selloffs are actually common.
After hitting bottom on March 9, 2009 in the financial crisis, the S&P 500 launched into the greatest bull run in history.
It posted a 14.4% annualized return to March 31,2020. But it wasn’t straight up. Along the way there have been times when volatility increased and markets sold off. And on March 9, 2020 the bull market turned into a so-called bear market. (Defined as a selloff of 20% or more.)
The sudden drop was triggered by the coronavirus (COVID-19) virus. As it spread, equity markets fell when it became clear that the virus would cause a severe economic slowdown.
Despite all the dire headlines they generate, deep selloffs are actually common. In fact, from 1945 to the end of March, the S&P 500 went through 26 corrections. (Defined as a decline of less than 20%). During this same period, it went through 12 bear markets, including the current one. Yet, the market is still far higher today.
Waiting for next bull market
During the March 2009-March 2020 bull run, market corrections followed the same pattern. The market fell, before moving on to new highs (chart below).
This example is for illustrative purposes only and is not intended to be representative of the performance of any actual or future investment available to investors. It is not possible to invest directly in an index. Returns are calculated in Canadian dollars, compounded daily, and assume reinvestment of all income and no transaction costs or taxes for the period from March 9, 2009 to March 31, 2020. Actual client returns would be different due to fees and expenses associated with investing which are not applicable to an index.
Correction Drop Length Return to Previous
(Months) high (Months)
April 23, 2010 to July 2, 2010 -16% 2 4
April 29, 2011 to Oct. 3, 2011 -19% 5 5
May 21, 2015 to Aug. 25, 2015 -12% 3 3
Nov. 3, 2015 to Feb. 11, 2016 -13% 3 3
Jan. 26, 2018 to Feb. 8, 2018 -10% 0.5 5
Sept. 30, 2018 to Dec. 24, 2018 -16% 3 6
Feb. 12, 2020, correction turns into
bear market (as of Mar. 31, 2020) -31% ? ?
Source: Sun Life Global Investments.
When the bears arrive
In the 11 bear markets on the S&P 500, prior to the current one, the pullback lasted on average 13 months with an average decline of 30%. (chart below). By comparison, the bear market, triggered by the 2008 financial crisis, lasted for almost 17 months. And the S&P 500 lost over 50% of its value.
How long will the current bear market last? Historically, downturns usually occur when the economy is either near, or in recession. However, in the current bear market, the economy declined in the COVID-19 pandemic. The length of the downturn could depend on how quickly the economy recovers from it.
Comparing bear markets and corrections
Since 1945: Average performance, length of downturn and recovery
Drop Length Return to previous
(Months) high (Months)
Bear markets 11 -30% 13 22
Corrections 26 -13% 4 4
Source: Goldman Sachs Global Investment Research
Diversified portfolios in a volatile market
In volatile markets you may want to consider working with a financial advisor to learn how a diversified portfolio may help to reduce risk. Simply put, by diversifying and holding a mix of bonds and equities, some may be increasing in value while others are falling. Over time, this potentially tends to reduce volatility and smooth out returns.
A financial advisor can also discuss why, after leaving the market, it is difficult (if not impossible) to time your return (chart below). And by sitting in cash, there is the potential for lost opportunity when the market recovers.
Missing the best days can hurt
Growth of $10,000 invested in the global stock market
Global stock market returns represented by MSCI World Index. Source: Morningstar.
This example is for illustrative purposes only and is not intended to be representative of the performance of any actual or future investment available to investors. It is not possible to invest directly in an index. Returns are calculated in Canadian dollars, compounded daily, and assumes reinvestment of all income and no transaction costs or taxes for the period January 1, 1985 to December 31, 2019. Actual client returns would be different due to fees and expenses associated with investing which are not applicable to an index. For purposes of this illustration, “best days” is defined as days with the highest growth in percentage terms.
In volatile markets, talk to your financial advisor
As we’ve shown in this article, equity markets are unpredictable but over time have historically moved higher.
That’s why you should work with a financial advisor, who can develop a long-term investment plan that helps you stay focused on your financial goals by looking beyond bouts of short-term volatility.