Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

Anatomy of a Bear Market

By John Nicola, Chairman and CEO

As I was putting together material for this newsletter it occurred to me that I had no idea where the name “Bear Market “came from. Needless to say after less than five seconds on Google I had the answer to my questions as to why a 20% drop in equities is described as a bear and a 20% rise becomes a bull.

According to Investopedia there are two possible explanations. The first one considers how bulls and bears attack their enemies. Bulls use their horns to lift them in the air (rising) while bears use their enormous strength to swipe with their paws down (falling).

The second explanation is actually related to markets.  In this case, the market in bear skins. Apparently middlemen would sell the skins before the trappers had brought them to the trading post and then gamble that the actual price for the bear skins would be lower when they arrived (one of the earliest examples of short selling). Literally a “bear market” was one in which prices fell.

With that information you are now armed for bear (my apologies) for your next trivia game.

We are clearly in a bear market now and, based on history, it could easily drop more. So far the S&P 500 has dropped about 25% from its February peak. As you can see from the table below, there have been more than 25 bear markets in the last 100 years and on average they last almost one year, and from peak to trough drop more than 35%.

I decided to look at three different bear markets that were the most severe and long-lasting. My hope in this review of history is to identify the best approaches to manage the equity portion of one’s assets.

Here are the three markets I chose to look at:

  1. The Great Depression / WWII – US equity markets dropped about 80% over three years and they did not fully recover on a price basis for almost 25 years (1954). Unemployment rose to 25% in the US and both GDP and prices fell a cumulative 25% by 1933.
  2. 1972-1981 – The inflationary recession that started near the end of the Vietnam War and lasted until US 10-year bonds hit an unprecedented 15.5% in August of 1981. This was triggered in no small part to the fact that a year before the annual inflation rate topped 14% in the US. However as you will see below, a strong argument can be made that the bear market began in 1968 and, when adjusted for inflation, did not fully recover until 1993 (25 years, or almost as long as the great depression).
  3. 2000-2013 – It may seem to many of you that I have my dates wrong. In the 21st century we started with the Dot Com crash in 2000 and the recession that followed. A few years later we had what we now call the Great Recession (2008/2009). But when we look at the numbers more closely they meld together into one long roller coaster ride for equity investors.

Before I continue, I’d like to give special thanks to the people at Macrotrends ( who have collated a great deal of information on historical economic data, some of which you will see below. Anyone can access this material and there is no cost.

To borrow a phrase from Steven Covey, let’s “begin with the end in mind”. What does this data show us?

  • Bear markets tend to take far longer to fully recover (i.e. reach their prior peak) than they do to reach their nadir or lowest point. From an investment perspective, this is a very positive reality since it gives us longer to rebalance our portfolios. It makes tactics such as dollar-cost-averaging and dividend reinvestment plans (DRIP) more effective.
  • Bear markets are inevitable and frequent. Truly epic ones that encompass several mini-bear markets (such as the three we have chosen to look at) are less frequent but no less inevitable. In each case the reasons for these shifts in equity values is different, but the market response is not. Coronavirus and its impact are unprecedented but how this reflects on current equity prices is consistent with other major events in history.
  • Looking at the bigger (long-term) picture. When we invest in equities (private or public) we are really investing in the economy both locally and globally. There can be no doubt that on a periodic basis the economy suffers a setback. Sometimes huge, as in the 1930’s, and sometimes relatively short and benign. If we consider ourselves to be long-term in our investment strategy then our main questions should be related to whether we feel the economy will be bigger and stronger in 10-20 years as opposed to 12-24 months. If we believe in long-term growth, then bear markets offer a great opportunity to acquire more of that future economy at a much lower price than we were paying before the markets dropped.
  • This brings perhaps one of the most important lessons from this data. It is quite easy to develop a model that allows investors to prosper during bear markets provided they can control their fear and emotions. Unfortunately, behavioural finance suggests that most investors cannot, and do not, manage their emotions well (especially in bear markets). One of our roles is to work closely with our clients to manage this issue well. It is arguably the most important role a Financial Advisor can fulfil.

Let’s look at the data.

The Great Depression

By far the most devastating bear market ever. Equities dropped in value by 80% and it took more than 10 years and a World War to get unemployment back to 1929 levels. But dividends were paid every year and the yield of the S&P 500 rose to 13.4% in June of 1932. If all one did was reinvest dividends as they were earned, instead of having a 0% rate of return over 25 years, the result would have been that $100,000 invested at the peak of the market in October 1929 would be worth more than $300,000 by 1954. That is just under 5% annually (3% after inflation) in the most difficult period that investors have experienced with public markets since stocks have been traded. Note, results would have been considerably better if any disciplined rebalancing program was utilized (i.e. selling bonds in which to buy more equities).

The Seventies Inflationary Recession (1972-1980 or 1968-1993)

This is a tale of two bear markets. The official one starting in December 1972 and lasting 7.5 years until June of 1980 (peak to peak). And the hidden one. When we adjust for the impact of inflation, which was a major factor for all of the 70’s and 80’s, the second chart tells a much different tale, as it shows the S&P 500 price adjusted for the impact of inflation. When we add that factor our bear market starts in 1968 and lasts until 1993. That is almost as long as the Great Depression. While this bear market did not show the extremes of the Great Depression, dividend yields did rise. In fact, while the nominal drop in the S&P 500 was 45%, there was almost no drop in dividends paid and as a result the yield on stocks rose from 2.8% to 5.4%. If investors were relying on cash flow during this period they were well supported.

The Dot Com Bubble and the Great Recession (2000-2013)

Economists and the media have considered these two periods as distinctly separate and the reasons for each being a bear market on its own are definitely different. The Dot Com peak in the spring of 2000 saw the S&P 500 PE ratio rise to the highest in its history (significantly higher than in 1929). Technology was ascendant and all one needed was a website address and millions of dollars were yours for the taking. Investors arguably experienced nothing like this since the South Sea Bubble of 1720, which cost Isaac Newton 20,000 Pounds (at least $2Million today) and caused him to write “I can calculate the motion of heavenly bodies but not the madness of crowds.”

While the S&P 500 dropped almost 50% in two years, the NASDAQ (laden with a plethora of tech stocks) dropped about 80% or as much as the S&P 500 did in 1929-1933. It took the NASDAQ until late 2017 to get back to its former lofty peak.

The Great Recession of 2007-2009 was triggered by a combination of a bubble in US and other countries’ housing markets financed by highly levered mortgage structures that required many of the world’s largest banks to seek government bailouts. The overall impact on the economy and unemployment was greater than any other period since the Great Depression.

Why am I trying to make the case that they are really one bear market? As an investor it does not matter that much what the cause of the bear market is. What matters is how it behaves and if one can see any discernible patterns. The chart below shows the Dot Com peak in 2000 first falling 49% and slowly recovering back to the prior peak in the late spring of 2007. A few months later, in October, the 2007 -2009 Great Recession and bear market starts; it drops 57% from its peak and takes until mid-2013 to fully recover.

In effect the market price of the S&P 500 showed a 0% gain from August 2000 until February 2013, or 12.5years. It was a perfect rollercoaster ride as it came back to its 2000 peak in 2007, only to fall once more.

All of this brings us back to 2020 and the Covid-19 bear market. We are likely still in the early innings if history is any indication. If we believe that, should we not just sell 100% of all equities and wait on the sidelines for the bottom?

It is an option, but as you can see predicting the bottom and ultimate recovery in any bear market is not easily achievable. What then is more predictable and what should investors do?

  • Ultimately (even if it is 25 years) a recovery occurs in equity and other markets.
  • Regardless of how badly the economy performs, some companies continue to grow and do well enough to pay dividends.
  • When those dividends are reinvested they in fact force us to buy more shares when prices are lower. The impact on our long term wealth is significant.
  • If we can add to that model a disciplined rebalancing approach, we will lower our average cost for equities which adds to our long term returns..
  • All of this requires us to be in a truly balanced asset allocation model that distributes regular cash flow from all components (interest, rents, and dividends). If an investor has the right model they can divert more monthly cash flow streams to a long-term DRIP/rebalancing strategy. In the scenario where an investor is already retired  and has a portfolio utilizing cash flow, then a 50% drop in equity prices has a much smaller impact on their wealth and almost no impact on their lifestyle.
  • Investors’ normal behavioural tendencies cause them to make the wrong decisions about buying, selling, asset allocation and risk. This is where a good professional advisor can make all of the difference.


We are experiencing an unprecedented event that is having a significant impact on certain asset classes, but in a way we have seen before and that follows recognizable patterns. I have no idea when markets will recover, but I feel quite confident I know how they will recover.

Having this clarity allows us, as the stewards of your financial well-being, to build an investment model to help weather any market turbulence, and to capitalize on the opportunities that will surely present themselves.  The partners and employees of Nicola Wealth are collectively one of the largest investors in our investment model and pools, so our interest couldn’t be more aligned.



This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. All investments contain risk and may gain or lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions.