#100 – Bear Markets and Sectors update

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#100 – Bear Markets and Sectors update

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Bear Markets – In this article you’ll find:

  • Bear Markets – Why bear markets are extremely important in your valuations.
  • Bear Markets – Why Higher Rates May Hurt the Economy More Than the Stock Market.
  • Bear Markets – Discretionary Stocks Could Rebound Well Before Earnings Do.
  • Bear Markets – Cheap Financials Valuations May Present an Opportunity.


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Bear Markets and Sectors update



I’ve read more than 50 books on value investing and business in general and what I understand from them is that you can do the big deals mainly during the bear markets.


Because during the bear markets we have high volatility in the markets and when there is high volatility usually it follows to create discrepancies between price and value in determined sectors/business and stocks.

And if you have the patience, the skill, the mindset to study and interpret well the bear markets, you can have a great probability to make great deal in the markets.


Bear Markets are different

This year has seen no shortage of market swings, with the S&P 500 down over -20% year-to-date.

However, given the absence of structural imbalances, we believe current market volatility is more in line with a cyclical bear market than a potentially deeper and longer structural bear market.

Goldman Sachs Asset Management explore the differences between each of the three bear markets—structural, cyclical, and event-driven—and introduce important factors when identifying market bottoms.

They distinguish between bear market rallies, as we experienced this summer, and the start of a new bull market.

As such, they believe that not all bear markets are created equally, and that understanding the current bear market can inform the timing and magnitude of the recovery.

Bear Markets

Let’s try to understand what it means each of one

Structural bear markets

have the deepest, most prolonged declines, averaging around -60% over the course of three years and taking up to a decade to fully recover.

What distinguishes a structural bear market from a cyclical one is the presence of meaningful financial imbalances, which we do not see as a risk today.

Cyclical bear markets

tend to fall about -30% at their maximum drawdown and last an average of two years, taking about five years to fully recover.

These tend to be associated with the economic cycle and monetary policy tightening.

Event-driven bear markets

are the shortest in duration and are typically triggered by an exogenous shock, such as the onset of the COVID-19 pandemic.

An average decline for event-driven bear markets is about -30%, and we typically do not see a prolonged recession as a result.

Higher Rates May Hurt the Economy More Than the Stock Market

Fidelity Investments reviewed the last time the U.S. Federal Reserve went all-in against high inflation.

On October 6, 1979, Fed Chair Paul Volcker gave a watershed speech detailing aggressive anti-inflation measures.

Industrial production fell 6%, and unemployment jumped to 7.5% over the subsequent 12 months.

But stocks gained 25%, helped by a plunge in crude prices—a good reminder that the economy is not the market.

Bear Markets


Discretionary Stocks Could Rebound Well Before Earnings Do

Consumer discretionary companies’ earnings have suffered since February.

Historically, the sector’s earnings slumps have tended to last about a year, and its stocks have started recovering an average of nine months before then.

Based on these precedents, discretionary may already have bottomed.

Cheap Financials Valuations May Present an Opportunity

Financials’ relative valuations are extremely low versus their history.

In the past, the cheaper the sector’s valuation compared with the rest of the market, the better its average relative performance the following year.

When financials have been in their cheapest quartile, they’ve outperformed the market by 5% over the next 12 months, on average.

Bear Markets

Important Consideration

Bear Markets

In the bear market rally this past summer, markets reflected growing confidence that inflation and interest rates were peaking, but unfortunately, we haven’t seen this in the markets.

History suggests that when the Federal Reserve (Fed) is the cause of a correction, it is often also the cure that enables the recovery.

Core inflation and rates have not come down convincingly.

Economic growth will likely continue to weaken.

And valuation/investor positioning have not yet reflected market capitulation.

From Fidelity we’re even seeing how Stocks May Benefit from a Rise in Real Wages

The S&P 500® has tended to advance after big jumps in this indicator, likely because higher real incomes boost spending power.

When Spending Power Increases, Consumer Discretionary Wins.

Consumer discretionary stocks have outperformed the market over the next 12 months 83% of the time, compared with just 28% for consumer staples.

More broadly, cyclical sectors have tended to outperform, and defensive have tended to lag.

Bear Markets

Join the conversation with your own take on these topics in the comments below.

About the Author

Alessandro is a Financial Markets enthusiastic and he loves learning from articles/papers on many financial topics.

In doing so he shares with you the most interesting charts and comments.


This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. 

This material has been prepared for informational purposes only. 

Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

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