Bear Markets: Always Different, Always the Same (EP.90b)

Episode Summary

Executive Summary: A special Rational Reminder episode reacting to the COVID-era market shock: the hosts review historic bear markets, argue that panic selling is usually a costly mistake, explain why bond ETF discounts to NAV surged under liquidity stress, and cover planning issues like tax-loss selling, RIF minimum reductions, and filing deadline extensions. The episode emphasizes patience, diversification, and decision-making under uncertainty.

Main Topics: Market crash context and investor psychology: The hosts open with the extraordinary week in markets, currency, oil, equities, and bonds, framing the episode as a reality check to help listeners maintain a long-term perspective amid fear and volatility. Historical bear markets and recovery patterns: A deep dive into U.S. bear markets from 1900 onward examines drawdown size, speed, recovery time, and the narratives attached to each episode, showing that most crashes were tied to identifiable shocks and that recovery can be long but is often faster post-1945. Why timing the market is dangerous: Using a simple market-timing simulation, the hosts show that getting out after a 15% decline and waiting to re-enter halfway through the recovery materially reduces long-run returns and can dramatically extend the time to regain prior wealth. Bond ETF discounts to NAV and liquidity stress: The episode explains why fixed-income ETFs briefly traded at large discounts to NAV during extreme volatility, emphasizing that NAV is model-based for illiquid bonds and that ETF market prices may better reflect real-time liquidity conditions. Decision-making, regret, and emotional discipline: A surgeon’s email about regret and hindsight is used to reinforce the idea that good decisions can still have bad outcomes, and that investors should judge decisions by process rather than short-term results. Factor behavior in bear markets: The hosts cite research showing that value, profitability, investment, and momentum factors have historically held up better than the market in severe drawdowns, while size tends to be more pro-cyclical. Practical planning and tax updates: They close with current Canadian planning items: tax-loss selling caveats, a 25% reduction in RIF minimums, deadline extensions for tax filing/payment, and warnings about scams and insurance delays.

Key Arguments: The current market decline is unusual in speed, but not unique in magnitude; history suggests sharp drawdowns often recover, though the path can be long and uneven. Trying to time exits and re-entries is risky: the average investor who leaves after a decline and waits for confirmation can miss the best recovery months and significantly underperform. Many historic crashes were driven by specific narratives—wars, recessions, leverage, policy shifts, or liquidity crises—so comparing today to a single past episode is often misleading. The Great Depression is commonly overstated in popular memory; once dividends and deflation are considered, purchasing power recovered faster than the oft-quoted 25 years. Bond ETF discounts to NAV do not necessarily imply ETF failure; rather, they reflect the difficulty of pricing illiquid bonds in a stressed market and the value of immediate liquidity. A good decision can still lead to a bad outcome; investors should focus on whether their decision was rational given the information available at the time. Factor exposures historically improve downside behavior and may support safer retirement outcomes, particularly when value/profitability/investment/momentum are included. Tax-loss selling can be useful but is not risk-free because it may run against the intent of the legislation and can create future tax consequences through a lower ACB.

Data Points: Canadian dollar weekly move: 72.4 cents to 68.4 cents, closing near 69–70 cents - Week’s FX volatility versus the U.S. dollar Canadian dollar year-to-date decline: Almost 10% - Compared with the start of the year near 77 cents USD WTI crude oil: Started year at 62, fell to just over 20, closed around 27 - Extreme oil market collapse during the week Western Canadian Select: 13.30 to 5.43, then back to 10.51 - Canadian heavy-oil benchmark volatility Dow Jones Industrial Average: 20,935 to under 19,000, closed at 19,173 - Equity market moves over the week XBB bond ETF intrweek drop: 31.73 to 28.65 - iShares Canadian bond ETF fell almost 10% in under three days XBB Friday volume: 400,000 shares - Roughly double normal trading volume Bear markets identified in U.S. data: 27 - Bear markets defined as 15%+ drawdowns using monthly data from 1900–2019 Average peak-to-trough drop: 29% - Across the 27 U.S. bear markets Average time peak to trough: 13 months - Historical bear market duration to reach the bottom Average time to recover to prior peak: 40 months - From peak down and back to the previous high; skewed by Great Depression and 2000 tech crash Post-1945 average recovery time: 26 months - Recovery duration shortened in the postwar era 1987 drawdown comparison: About -30% within three months - Current decline resembles 1987 on paper, though the speed is more extreme now Best month omission effect: 21 additional months to reach prior peak - Missing the best month in the full sample Market-timing model annualized return: 8.39% vs 7.93% - Staying invested versus selling at 15% down and re-entering halfway through recovery The Great Depression drawdown: -83% - Peak-to-trough from September 1929 era within the broader Depression period Worst retirement year in sample: 1966 - From 1926 onward, not 1929 Inflation vs market return, 1966-1979: CPI 6.49% vs market 5.62% - Led to negative real returns over the period Great Depression recovery in purchasing power: 7 years - Including dividends and deflation, purchasing power recovered faster than commonly claimed AGG discount to NAV: 4.43% - U.S. aggregate bond ETF discount on March 16 stress day BND discount to NAV: 6.17% - Vanguard Total Bond ETF discount on March 16 stress day XBB discount to NAV: About 4% - Canadian bond ETF market price versus NAV during stress VSC discount to NAV: About 8% - Vanguard short-term corporate bond ETF during stress RIF minimum withdrawal reduction: 25% - Canadian temporary reduction in minimum withdrawals Example RIF minimum rate: 5.28% to 3.96% - For someone turning 71 in the year of the policy change

Pivotal Quotes: "Complexity never repeats itself in its exact form. But as Voltaire says, history never repeats itself, man always does." — Benjamin Felix quoting Morgan Housel: Discussion of why history is useful but imperfect when mapping today’s crisis to past crises "Disasters do not make societies panic. Panic, they bring them together in calm solidarity." — Benjamin Felix summarizing Charles Fritz via Morgan Housel: On the possibility of cooperation and social cohesion emerging from crisis "The decision to not sell was based on our inability to predict market changes. So, while the outcome sucks... this decision was correct." — Guest surgeon email quoted by hosts: Decision-making, hindsight, and regret in investing and medicine

Implications: Listeners should expect volatility, avoid reflexive selling, and judge decisions by process. For advisors and investors, the episode reinforces disciplined diversification, liquidity awareness in bonds, and careful use of tax/retirement rules during crisis.