The bear market in U.S. stocks will last longer than three more months. That’s the message being sent from the market’s sector relative strength rankings. Over the final three months of past bear markets, there was a distinct pattern to those rankings. Today’s trailing three-month sector ranking bears no resemblance to that pattern.
This puts the drama surrounding the collapse of Silicon Valley Bank
in a different light. If the bear market does continue, many will be inclined to blame the banking crisis. But the financial sector’s relatively weak strength has been ongoing; it didn’t start in the past two or three trading sessions.
Consider the Utilities, Consumer Staples, and Health Care sectors, which were first-, second- and third-best performers over the final three months of all bear markets since 1970, according to data from Ned Davis Research. Each outperformed the S&P 500
in all but one of those bear markets, in fact.
Over the past three months, in contrast, these three key sectors have been the worst three performers. Each has significantly lagged the broad market.
The accompanying table reports the comparable data for all 11 of the S&P 500’s major sectors. While the full ranking doesn’t completely follow a first-shall-be-last script, it largely does. The correlation coefficient between the historical ranking and the current one is minus 0.33, which means that the correlation is significantly inverse.
It makes sense that certain sectors would perform better than others at the end of a bear market. That’s when investors become despondent, as they finally throw in the towel on their erstwhile optimism.
The most defensive sectors — Utilities, Consumer Staples, and Health Care — should be hurt the least in this process. In contrast, the sectors most vulnerable during a bear market’s last gasp will be those that are particularly sensitive to economic weakness, such as Industrials, Materials, and Financials.
“ Eagerness to jump on the bullish bandwagon is typical of a bear-market rally. ”
Investors in recent months were quick to believe that happy days were here again. They bid up economically sensitive sectors, while downplaying defensive stocks. This eagerness to jump on the bullish bandwagon is typical of a bear-market rally. At the beginning of a long-term bull market, there is instead a reluctance to believe — a stubborn insistence that the bear market is just taking a breather.
If the next several months follow the typical contrarian script for a bear market, the October 2022 low will likely be revisited in coming months. As investors gradually realize their gullibility in believing that the October low was the final bear market low, they will swear off equities. You’ll start seeing headlines to the effect that “buy and hold” is dead or, even more dramatically, a repeat of the infamous Business Week headline in 1979 “The Death of Equities.”
As contrarians like to remind us, that headline came near the beginning of one of the best decades for stocks in recent history. They would anticipate something similar this time around too — if and when investors collectively throw in the towel. But, as the past several months illustrate, be careful not to jump the gun.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at email@example.com
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