Bull markets are characterised by investor optimism and sustained growth that fuels gains across most sectors. That is why the saying “anything works in a bull market” is essentially true. While that doesn’t necessarily apply to meme stocks, IPOs or other speculative investments, when the market is healthy, stocks are likely to move up and to the suitable. But when the tide turns, finding success in a bear market — or a chronic drop of greater than 20% from a recent high — could be a daunting task.
That’s something investors will probably want to begin preparing for. For the reason that last bear market ended on Oct. 14, 2022, the S&P 500 gained 70.65% through Feb. 14, 2025, when essentially the most recent sell-off began. Greater than a month later, the main indexes are in or on the verge of a correction, marked by a drop of 10–20% from a recent high. The S&P 500 is down 8.50% from its year-to-date high and briefly entered a correction last week. The Dow Jones Industrial Average (DJIA) is close behind, down 7.57% from its six-month high, and the Nasdaq — down 12.83% from its six-month high — entered a correction throughout the first week of March.
No matter whether this downturn develops right into a bear market, history provides clues about easy methods to best approach serious declines, which may help alleviate investors’ fears when the market takes a turn for the more serious. Knowing which sectors traditionally outperform during downturns — and which underperforming sectors present buying opportunities — is equally vital.
Finding balance
When fear consumes the market, remaining disciplined and never reacting impulsively is paramount, based on Tim Thomas, chief investment officer and wealth manager at Badgley Phelps.
“It is vital to remain balanced and never get too far over your skis in a single direction or one other,” Thomas says. “Have just a little little bit of exposure to traditional defensive [sectors], but in addition benefit from the declines in some risk-on stocks which can be more cyclical, like tech.”
Defensive sectors function secure havens during market downturns because they’re historically less volatile. But finding an equilibrium between lower-risk, lower-reward sectors and higher-risk, higher-reward stocks is crucial. “ You’ve to have a foot in each camps,” he says. “It’s really vital to not get too bearish or too defensive.”
Understanding where we’re out there cycle may help determine that balance. In keeping with Thomas, which means preparing for bear markets during bull markets and preparing for bull markets during bear markets. But with a purpose to accomplish that, investors have to know where to search for each safety and opportunity.
Big and boring
During downturns, certain corners of the market have protected investors higher than others. Thomas suggests targeting best-of-breed firms, specifically in difficult times, which may act as cornerstones of a portfolio for the long run.
“We search for very strong balance sheets, great management teams and corporations which have a definite competitive advantage that basically cannot be eroded quickly,” he says. “They have an inclination to generate consistent earnings and consistent returns for investors over long periods.”
These often include long-standing organizations in sectors which can be well-equipped to endure various market cycles and economic disruptions. Historically, they’ve fallen right into a handful of the S&P 500’s 11 sectors, which are likely to outperform during elevated volatility and prolonged bearishness. The patron staples and consumer discretionary sectors, for instance, can function bellwethers for the direction of the general market. When consumer confidence and spending are high, indicating a powerful economy, that always translates to stocks in the patron discretionary sector performing well. But when that sector lags and consumer staples outperform, it will possibly be indicative of a late-stage bull market.
In 2022, the patron staples sector posted a lack of 0.6%. While that would not typically turn heads, during that bear market, it was ok for a third-place finish amongst all sectors. At the identical time, consumer discretionary finished second-worst amongst all sectors with a lack of 37%.When economic conditions worsen, needs outweigh wants and consumer and discretionary purchases — akin to dining out, travel and entertainment — are sometimes eliminated from household budgets. To date in 2024, the patron discretionary sector has posted a year-to-date lack of 12.31% — worst amongst all 11 sectors by a large margin.
The lackluster performances of cyclical and growth-oriented sectors, including tech and communication services, may act as barometers for protracted downturns. While stocks in those categories often present investors with strong upside potential, the inverse could be true in down markets. From 2017 to 2024, tech or communication services finished first or second amongst all 11 sectors eight times. But in 2022, tech’s 28.2% loss saw it finish third-worst, one spot above consumer discretionary, while communication services finished last with a lack of 39.9%.
Then again, utilities — considered defensive because electricity, water and gas are essential services — are likely to perform well during bear markets. In 2022, that sector was the second-best performer after posting a gain of 1.6%. Going farther back, within the wake of the COVID-induced market crash, consumer staples and utilities recovered quickly as demand remained strong, bottoming on March 20, 2020, and posting gains of 33.83% and 31.12%, respectively, through the rest of that yr.
One other perk of investing in defensive positions during downturns is that those firms are sometimes well-established and pay sizable dividends, which may help offset their inherently slower growth. Duke Energy, for instance, was founded in 1904 and pays a dividend yielding 3.46%. From a valuation standpoint, utilities remain underpriced despite their strong performance this yr, based on Jeff Buchbinder, chief equity strategist at LPL Financial. As a bonus, he notes that a lower interest-rate environment makes the dividends utilities pay out more attractive.
Buying opportunities
While the aforementioned safe-haven sectors can insulate portfolios from losses during corrections and bear markets, growth sectors which can be historically more susceptible during downturns can present tremendous buy-low opportunities. Despite significant losses within the last bear market, tech and communication services went on to complete atop all sectors in 2023 and 2024, respectively, with consumer discretionary ending third and fourth in those years.
Using a selected example from communication services, Google-parent company Alphabet lost nearly 39% in 2022 but gained nearly 59% in 2023 and greater than 41% in 2024. Amazon, which falls into the patron discretionary sector, saw similar results. After losing nearly 50% in 2022, it posted gains of greater than 80% in 2023 and greater than 54% in 2024.
“The patron discretionary sector is below its average valuation,” Buchbinder says. “Not surprisingly given its 14% year-to-date decline amid slowing consumer spending and sharp drops in Amazon.”
Returning to the COVID-crash example, while consumer staples and utilities — defensive sectors — provided investors with safety amid the recovery, their gains paled as compared to the tech sector’s. From March 20, 2020, through the top of that yr, tech gained 82.05%. That scenario could repeat given the correction some cyclical growth stocks have already undergone.
Despite entering a correction this yr, Buchbinder says tech is anticipated to grow earnings per share by 20% this yr — the very best amongst all 11 sectors.
Those are the forms of opportunities investors should listen to, particularly given expectations of modest gains for the S&P 500 in 2025. Nevertheless, the importance of approaching a correction or bear market with balance can’t be overstated.
“You’ll be able to’t control the market,” Thomas says. “But you’ll be able to control the way you manage your portfolio.”
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