In times of uncertainty, it’s often instructive to review the cyclical patterns of past bear and bull markets. There may be lessons when it comes to avoiding big price drops in a portfolio, despite severe declines across the broad market.

The need for a defensive strategy is particularly timely because investors now confront an almost certain business slowdown — perhaps even a recession. And in advance of every major business slowdown comes a stock market drop.

Of course, in every collapsing market, some stocks do rise. But these survivors generally make their way forward company by company, not in clumps of similar businesses. Even after a short bear market, such as the 1987 Black Monday crash, many industries have difficulty regaining their old highs soon thereafter. The one exception, on occasion, has been precious metals mining.

One of the best places to start the review is the U.S. market, because it is still the world’s largest and most diversified, and has the most detailed records. In past bear markets, every sector of U.S. business and finance has dropped when a business slowdown is imminent. Even “defensive” industries such as utilities fall.

The Canadian experience is usually quite similar — sometimes a bear market is worse here; sometimes it is less severe.

Will it, in the famous phrase, “be different this time?” That is not a good bet. The market, being cyclical, tends to repeat itself.

The problem with trying to chart a course through a period during which stock prices generally go down rather than up is the great imponderable: no one knows at the beginning how long and how far a bear market will go.

Sometimes a bear move is deep and extended, such as the drop that began in 1971 and ended in 1974. Sometimes a bear move is quick, as in 1987. Both varieties, though, are dangerous. Recovery, even for a short bear market, is slow. And every part of the market hurts.

In the 1974 bear market, the stock market unwound the great gains of the 1950s and 1960s. The monthly average price of the Standard & Poor’s composite index dropped 43%. It did not regain its pre-bear high until six years later.

The 1987 crash was shorter and less severe: the S&P index dropped 27%. But the market was unable to rally to its pre-crash high until two years later.

In estimating market prospects, keep in mind that stocks suffer a major drop of the 1974 scale every 30 or 40 years. The 1929-32 drop ushered in what is now known as the Great Depression. Before then, a Great Depression had occurred in the 1890s, marked by the stock market drop of 1887-96.

The table at right shows the portfolio-management problem every investor faces when the market drops and drops. Even the “quick” 1987 crash badly injured some industries.

Although average price drops were less in 1987 than in the 1971-74 drop, many industries languished below their preceding highs for years. By the end of 1989, 58 industries had matched their pre-1987 crash highs, but 26 had not.

Two years after the 1974 low, only 15 industries had regained their former highs. That meant 47 industries remained in the wilderness, and some only regained their former highs 10 years later. That may reflect its severity: the 1974 decline, the worst since the carnage of 1929-32, resulted in steeper price declines and longer recovery times than in 1987. In the 1987 drop, most industries lost less than 40% in value. In 1974, most industries dropped more than 40%.

There are two possible ways out of this portfolio strategy dilemma. One is precious metals stocks, in a bull market of their own because of the weak U.S. dollar and the growing credit crisis. The other approach is to watch the list of new highs if the market does go into a tailspin. Those stocks offer the possibility of weathering a storm that might last for several years. IE