Analyzing S&P/TSX During Recessions
What TSX Teaches Us In Crises
Starting from the year 2000, the Toronto Stock Exchange (TSX) has experienced three significant periods of decline.
This visually appealing graphic, supported by Fidelity Investments, delves into the progression, causes of decline, and subsequent rebounds following the three significant declines in the S&P/TSX Composite Index, which serves as the reference point for the Canadian market.
Examining the historical records obtained from Yahoo Finance, let's delve into the intricacies of three economic disasters that triggered downward spirals, adversely affecting the TSX Composite from 2000 all the way to 2022.
The Internet Bubble
The advent of the new millennium brought a transformation in businesses through the advancements of internet technology.
Introduction: The excitement and conjecture revolving around the immense possibilities of the internet gave birth to a phenomenon where stock prices skyrocketed, disregarding the fact that numerous companies had no actual earnings or revenue.
Stock Market Collapse: As the true situation became apparent, the outlook of investors quickly changed, leading to fast and large-scale selling. Between September 2000 and October 2002, the overall value of the TSX Composite index declined by half.
According to investment stakeholder Fred Wilson:
A significant portion of the money that was put into investments went down the drain, but a substantial amount was also allocated to developing a high-speed network infrastructure for the Internet... All of these advancements have paved the way for the transformative impact we witness in our lives today.
Rebound: Investment portfolios were reassessed, and simultaneously, innovative digital technologies were also coming into the picture. This sparked a revival that set the stage for a fresh upswing in the market. Nevertheless, it took more than 1,000 days of trading to bounce back.
The Worldwide Economic Crash
The onset of the worldwide economic downturn that commenced in 2007 was responsible for this.
Background: The combination of lending money for mortgages with a high level of risk and insufficient supervision from regulators caused a sequence of events in the United States. These events involved many banks collapsing, a halt in the availability of credit, and a decrease in economic activity.
Market Collapse: The significant downfall of low-quality mortgages caused ripples of disruption across global financial markets, impacting Canada as well. Between June 2008 and March 2009, the Toronto Stock Exchange (TSX) experienced a staggering 50% decline.
Recovery: It took over 1,300 trading days for the index to bounce back, but the Canadian economy, which relies heavily on exports, reaped the benefits of the revival in global commodity prices.
It is noteworthy that Canada experienced a similar and significant economic downturn like the United States. However, unlike the U.S., none of Canada's banks faced failure because of a carefully regulated framework involving major financial institutions. In contrast, the U.S. had a decentralized structure with numerous smaller banks supervised by different regulatory bodies in competition with each other.
In the year 2020, a fresh obstacle unfolded - the COVID-19 pandemic, which had a profound effect on economies worldwide, causing brief yet impactful economic downturns across the planet.
Progress: Just like other stock market indicators, the TSX Composite was on the rise in the months leading up to the pandemic.
Stock Market Plummet: The announcement of a state of urgency caused the TSX to experience its most substantial single-day decline since 1940, plummeting by more than 12%. In a matter of weeks, the index tumbled by a staggering 37%.
Bounce back: Following a swift reduction in interest rates, the market index experienced a notable increase of 9.4% within a span of seven days. The TSX Composite made an impressive recovery in a total of 222 trading sessions, thanks to measures aimed at stimulating the economy and the diligent work towards developing a vaccine.
Although every recession has unique causes, historical trends indicate that they all eventually lead to a resurgence and expansion.
Additionally, different industries are impacted in varying ways, and a well-balanced investment portfolio that includes a range of assets and sectors can serve as a safety net.
Lastly, it is essential to have a mindset for the long run, plan with patience, and seize the chance to make purchases when prices drop.
As the saying goes, engaging in investments is a long-distance race, not a short burst of speed.
