Many argue that newly confirmed bear market has long and far to fall—particularly for big Tech and growth stocks. Others just fear it. Maybe. With inflation-phobia globally, Russian attacks threatening grain supplies and endless intensifying recession chatter, the bad news won’t vanish overnight. But as I wrote last month, this is no time to fall prey to The Great Humiliator’s tricks and avoid stocks. Downturns can be brutal. This one is. But after every bear market comes a bull market—bringing opportunity in recovery. Toward that, now is a time to position for the coming spring-loaded bounce—which means owning the growth stocks now commonly shunned.
Crossing the official -20% bear market threshold sounds scary but changes nothing about what you should do ahead. If you needed equity exposure before this downturn, avoiding stocks now likely doubles your trouble. Investment decisions must be forward-looking—not backward.
Being in a bear market now doesn’t imply big downside ahead or a long decline. Since MSCI World data start in 1969, the median time from piercing -20% to a downturn’s low is 0.8 months. From there back to -20% has taken a median 0.3 months. The median drop to the bottom after crossing that -20% threshold? Just -7.6%. The rally is very likely at hand soon—maybe it already started. Regardless, selling now risks missing it, potentially making this year’s slide harder to recoup. Look now to the recovery.
Ordinarily, economically sensitive value stocks lead bear markets down as recession worries lead many to fret their survival. Then they bounce big in new bull markets—initially, a relief rally that the most catastrophic worries didn’t materialize. But this time, world growth stocks’ plunge has doubled value’s slide since January’s global high. Many call it a “regime shift,” arguing lofty valuations and rising rates killed growth’s dominance. The simpler, unseen truth: Today’s value strength is entangled with bearishness. It is almost all about up versus down. On down days growth lags badly. On up days it leads markedly. Growth is lagging because stocks have been down. It is a double negative that should soon be a double positive.
Consider: Through June 21, US stocks rose 52 days this year. Growth beat value 80.8% of those days. Stocks fell 65 days. Value beat growth on 83.1% of them. Stocks fall, value leads. Stocks rise, growth leads. Simple. So simple no one notices, which I love.
This trend is fully global. Through June 21, world growth stocks topped value 73.1% of the up days, while value led on 78.6% of the down days. The marriage of stock style and market direction is an unseen entanglement hiding in plain sight.
What explains this? Sentiment. In my last column, I explained how this bear market looks more like a correction, but with a swarm of scares causing the longer, deeper decline. But there’s more to it than that: The fears behind this move nearly all key on growth stocks.
Take rising rates. Many argue they decrease future earnings’ value, disproportionately whacking growth stocks with sparkly profit projections. That theory is dodgy at best, considering world Tech stocks outperformed in over half of years since 1973 when rates rose. But fear saps sentiment. Conversely, higher rates may benefit value-heavy Financials.
Soaring energy prices and commodity shortages, meanwhile, directly benefit the value-dominated Energy and Materials sectors. Recession fears aid defensive Utilities and Staples. While commodity weakness has hit Energy and Materials in recent days, those four sectors are among the top five globally and in America since January’s highs.
But their leadership shows you forward-looking markets already pre-priced these factors. Meanwhile overlooked positives percolate—the increasingly positively sloped global yield curve (10Year minus 90 Day), America’s accelerating oil production, robust loan growth and China’s reopening.
That mostly favors growth. In the seven US bear markets since 1970, when sectors started looking like they do today, the worst-performing sectors have fairly consistently rebounded strongest. Sector returns during those downturns’ final three months had a median correlation of -0.73 with returns six months post-bottom. Given 1.0 means lockstep movement and -1.0 means polar opposite, this indicates a huge tendency for bear market laggards to become leaders—fast. Sometimes that fades in the months after the initial bounce. But there will be time to reassess that later.
Today, that means targeting growth-dominated Consumer Discretionary, Communications Services and Tech—the downturn’s three worst global sectors. All were down over -27% from January’s high through June 21, with key growth industries faring worse. Tech-like Internet and Direct Retail firms and Interactive Media companies plunged -37.5% and -33.3%, respectively. Luxury Goods firms slid -33.5%. Don’t fear talk of Tech layoffs and inflation kneecapping consumer spending—those widespread fears should be largely pre-priced. Now big declines tee up big rebounds. Anticipate a V-shaped bounce led by stocks nearly everyone ditched in the downturn.
In markets, myopia is misery. Hard as it may be, now is time to look to the growth-led recovery likely lurking just ahead.
