Updated: Nov 9, 2021
Early in September, 2019 we got our first
real glimpse at how the next bear market might play out.
The S&P 500 lost about 25 points in one day. Wall Street’s favorite momentum stocks led the way lower. Amazon (AMZN) lost nearly 2%. Beyond Meat (BYND) was trimmed by $13. Trade Desk (TTD) dropped about $30 per share.
Many investors dumped their growth and bought value and suddenly the worst performing stocks of 2019 started to rally.
Halliburton (HAL) was down 30% for the year but gained 5% in one day. Shares of Macy’s (M), had lost 40% in 2019, and jumped 6%. And Teva Pharmaceuticals (TEVA), which had fallen more than 60% this year, rallied more than 7%... all on a day most of the stock market was getting crushed.
A week later it happened again. The stock market generally traded sharply lower with growth stocks suffering most. But money flowed into the “value” stocks that have underperformed all year.
That very well may be the way the next bear market plays out where money flows out of stocks that have been the best performing stocks of the past few years and flows into the worst performers. That would be a “rotational bear market” – where growth stocks fall and value stocks rise.
Understand…while the major stock market indexes have enjoyed a decade-long bull market run, many individual stocks have already suffered terrible bear markets. Sellers have already given up on many of these “value” stocks – those protecting a profit or limiting a loss have already sold. They’re not so exposed to the bear market – because they’ve already been beaten down.
In that scenario, stocks that suffer the most damage are likely to be Wall Street’s high-flying, momentum stocks. The stocks with no earnings, that trade at 10, 15, even 20 times revenue. The stocks investors have been willing to buy at any price over the past year because stocks have kept going up.
But when that changes – and it can suddenly, and potentially sooner than folks might think – those momentum stocks will get crushed. And, that money will find its way into the old-fashioned stocks that have been around forever, that pay solid dividends, and trade at extremely low price-to-earnings ratios.