Understanding market volatility

March 17, 2023

Recession? Market correction? Bear market? What to expect.

Worried about your investments? This article will help you understand what market upheavals can be.

What’s the difference between a recession, a market correction, and a bear market? Investors sometimes get the terms mixed up. One has to do with economic growth. The other two are related to stock market performance.

A market correction occurs when a stock market index, such as the S&P/TSX Composite Index, drops by 10% or more from its previous peak. When the decline reaches 20%, it’s called a bear market. If that 20 % decline happens over a very short period, then it is a stock market crash.

A recession occurs when a region's economic growth, measured by gross domestic product (GDP), declines for at least two consecutive quarters. It ends once GDP recovers.

When a recession is prolonged, it’s called a depression. To learn more about the difference between a recession and a depression, read this article.

How do you predict a recession?

It’s impossible to predict a recession with certainty. That’s because the only way to know if a recession or market correction occurs is to look back at past data. But we know that, throughout history, market corrections happen more often than recessions.

Stock markets have had more than 50 declines greater than 10% since 1928.¹ During this period, stock markets in Canada dropped by more than 20% in 11 of those events. The following table shows the causes of these declines, and the rebound that followed:

Recent bear markets with declines of more than 20% in the S&P/TSX Composite Index

Event	Bear Market Period	Decline (From the previous high to the bottom)	Time to Return to the Previous High	Performance in the Year After Hitting the Bottom	Performance During the Stock Market Recovery
Vietnam War	05/1969 - 05/1970	-29%	2 years	25%	68% over 3 years (16%/year)
Oil Embargo	10/1973 - 12/1974	-37%	4 years	14%	182% over 6 years (19%/year)
2nd oil shock and the fight against inflation	11/1980 - 07/1982	-44%	1 year	84%	205% over 5 years (24%/year)
Black Monday October 1987 crash	08/1987 - 10/1987	-31%	2 years	20%	42% over 2 years (18%/year)
Recession and the Gulf War	10/1989 - 10/1990	-25%	3 years	14%	150% over 8 years (13%/year)
Failure of the LTCM hedge fund and the emerging markets crisis	04/1998 - 10/1998	-32%	1 year	32%	113% over 2 years (49%/year)
Dot-com bubble	09/2000 - 10/2002	-50%	3 years	33%	165% over 6 years (19%/year)
Housing bubble and financial crisis	06/2008 - 03/2009	-50%	5 years	58%	89% over 2 years (36%/year)
Sovereign debt crisis (euro area)	04/2011 - 10/2011	-22%	2 years	11%	40% over 3 years (12%/year)
Oil price plunge	09/2014 - 01/2016	-24%	1 year	30%	50% over 4 years (11%/year)
Public health crisis (COVID-19)	02/2020 - 03/2020	-38%	1 year	68%	N/A
Average		-35%	2.3 years	35%	117% over 4 years (21%/year)

Sources: Autorité des marchés financiers, Thomson Reuters

Canada in fact experienced a market correction of more than 10% in 2022. It also came perilously close to the 20% fall defined as a bear market. The S&P/TSX composite index reached a peak of 22,085 on April 4, 2022.² Then it dropped to 18,206 on October 12, a decline of 17%.²

So why are people talking about a recession?

The two phenomena aren’t always related, even though historically a recession often follows a market correction. Canada has had five recessions lasting six months or more since 1970³:

January 1980 to June 1980 (6 months)
June 1981 to October 1982 (17 months)
March 1990 to April 1992 (13 months)
October 2008 to May 2009 (8 months)
March 2020 to August 2020 (6 months)

Many investment experts believe a recession may happen in 2023. Several indicators point in this direction, such as housing. As well, the Bank of Canada’s recent interest rate hikes have aimed to cool the economy and push down inflation. That’s why a recession might be on the way.

The key is – don’t panic

Whether or not Canada is on the verge of a recession, the key for investors is to not panic and to not make hasty decisions. By staying invested in the markets, you are likely to benefit from a rebound that often follows a drop in the markets. In fact, you can perhaps make the most gains on your investments when markets are at their lowest point.

If you’re stressed about negative economic news, it may be a good time to talk to your advisor. Or find an advisor if you don’t already have one. An advisor can help you review your risk tolerance. An advisor can also make sure your investments are diversified so that they increase in value over the long term and help you to reach your financial goals.

Want to learn more about the benefits of staying invested in the markets? Read this article.

What are the benefits of having diversified investments? This article explains.

¹According to Les Affaires
²According to S&P/TSX Composite Index end-day data
³According to The Canadian Encyclopedia

The information contained in this document is provided for information purposes only and is not intended to represent specific individual financial investment, tax or legal advice nor does it constitute a specific offer to buy an/or sell securities. While the information contained in this document has been obtained from sources believed to be reliable, SLGI Asset Management Inc. cannot guarantee its accuracy, completeness or timeliness. Information in this document is subject to change without notice and SLGI Asset Management Inc. disclaims any responsibility to update it.

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Understanding market volatility

Recession? Market correction? Bear market? What to expect.

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