Bull markets are defined by a wave of investor optimism and consistent growth, which drives gains across various sectors. This is why the phrase “anything works in a bull market” holds significant truth. Though this may not apply to meme stocks, IPOs, or other speculative investments, a healthy market typically sees stocks trend upwards. However, when the market shifts, achieving success in a bear market—a scenario characterized by a decline of over 20% from recent highs—can prove to be a formidable challenge for investors.
Investors should start strategizing for such downturns. Since the last bear market concluded on October 14, 2022, the S&P 500 surged by 70.65% until February 14, 2025, when the latest sell-off began. Over a month later, major indexes have either entered or are nearing a correction, which is defined by a decrease of 10–20% from recent highs. The S&P 500 has dropped by 8.50% from its year-to-date peak and briefly entered correction territory last week. The Dow Jones Industrial Average (DJIA) follows closely behind, down 7.57% from its six-month peak, while the Nasdaq has experienced a decline of 12.83% from its six-month high, officially entering a correction in early March.
Regardless of whether the current downturn morphs into a full-fledged bear market, historical trends offer valuable insights into how to navigate significant declines. This understanding can help mitigate investors’ anxieties when the market experiences volatility. Identifying which sectors have historically outperformed during downturns, as well as recognizing underperforming sectors that may present potential buying opportunities, is crucial for investors.
Strategies for Achieving Investment Balance During Market Uncertainty
When fear pervades the market, it becomes essential to stay disciplined and avoid knee-jerk reactions. Tim Thomas, chief investment officer and wealth manager at Badgley Phelps, emphasizes the importance of maintaining composure during turbulent times.
“It’s crucial to keep a balanced approach and avoid overexposure in one direction or another,” states Thomas. “Maintain some exposure to traditional defensive investments, while also seizing opportunities in risk-on stocks that are cyclical, particularly in the technology sector.”
Defensive sectors are typically seen as safe havens during turbulent market conditions due to their historical resilience. However, striking a balance between low-risk, low-reward sectors and higher-risk, higher-reward stocks is vital for long-term success. “You need to have a foot in both camps,” he advises. “It’s imperative not to become overly bearish or too defensive in your strategy.”
Grasping the current phase of the market cycle is essential for determining this balance. According to Thomas, this involves preparing for bear markets during bull markets and vice versa. To achieve this, investors must know where to seek both safety and opportunities, thereby enhancing their overall investment strategy.
Investing in Resilient, Established Companies During Market Declines
In times of downturn, certain segments of the market can safeguard investors more effectively than others. Thomas recommends focusing on top-tier companies, particularly during challenging periods, which can serve as foundational elements in a well-diversified portfolio.
“We prioritize companies with robust balance sheets, exceptional management teams, and distinct competitive advantages that are not easily undermined,” he explains. “Such companies tend to produce consistent earnings and reliable returns for investors over extended periods.”
These companies often belong to established sectors that are equipped to withstand various market cycles and economic disruptions. Historically, they have been concentrated in specific sectors within the S&P 500, which tend to outperform during periods of high volatility and prolonged bearishness. For instance, the consumer staples and consumer discretionary sectors can be indicators of the broader market’s direction. When consumer confidence and spending are elevated, it generally leads to strong performance in the consumer discretionary sector. Conversely, when this sector underperforms while consumer staples thrive, it can signal a late-stage bull market.
In 2022, the consumer staples sector recorded a modest loss of 0.6%. While this might not seem significant, it ranked third among all sectors during that bear market. Meanwhile, the consumer discretionary sector suffered a substantial loss of 37%, placing it second-worst overall. As economic conditions deteriorate, essential needs take precedence over discretionary wants, leading to a reduction in expenses on non-essential items such as dining out, travel, and entertainment. So far in 2024, the consumer discretionary sector has experienced a year-to-date decline of 12.31%, the worst performance among all 11 sectors.
The disappointing results from cyclical and growth-oriented sectors, including technology and communication services, can also serve as indicators of extended downturns. While stocks in these categories often provide significant upside potential, the opposite can be true during market declines. From 2017 to 2024, technology or communication services consistently ranked among the top two sectors eight times. However, in 2022, the technology sector faced a 28.2% decline, ranking third-worst, just above consumer discretionary, while communication services took the last position with a staggering 39.9% loss.
In contrast, utilities, deemed defensive due to the essential nature of electricity, water, and gas services, typically perform well during bear markets. In 2022, this sector achieved a 1.6% gain, making it the second-best performer. Looking back to the aftermath of the COVID-induced market crash, both consumer staples and utilities rebounded quickly as demand remained strong, bottoming out on March 20, 2020, and achieving gains of 33.83% and 31.12%, respectively, for the remainder of that year.
Another advantage of investing in defensive positions during downturns is that these companies are often well-established and offer substantial dividends, which can help mitigate their slower growth rates. For example, Duke Energy, founded in 1904, provides a dividend yield of 3.46%. From a valuation perspective, utilities are still considered undervalued despite their strong performance this year, according to Jeff Buchbinder, chief equity strategist at LPL Financial. Furthermore, he notes that a lower interest-rate environment enhances the appeal of the dividends paid by utilities.
Identifying Lucrative Buying Opportunities in Market Corrections
While the aforementioned defensive sectors can provide a buffer against losses during corrections and bear markets, growth sectors that are typically more vulnerable during downturns can offer remarkable buy-low opportunities. Despite enduring significant losses in the last bear market, companies in the technology and communication services sectors rebounded to lead all sectors in performance for 2023 and 2024, respectively, with consumer discretionary also posting strong results.
For instance, Alphabet, the parent company of Google, suffered a nearly 39% loss in 2022 but rebounded with gains of nearly 59% in 2023 and over 41% in 2024. Similarly, Amazon, part of the consumer discretionary sector, faced a nearly 50% decline in 2022 but saw its stock soar more than 80% in 2023 and over 54% in 2024.
“The consumer discretionary sector is currently trading below its average valuation,” notes Buchbinder. “This trend is not surprising, considering its 14% year-to-date decline amid slowing consumer spending and significant drops in Amazon’s stock.”
Reflecting on the recovery following the COVID crash, while defensive sectors like consumer staples and utilities offered safety, their gains were overshadowed by the remarkable performance of the technology sector. From March 20, 2020, through the end of that year, technology stocks surged by 82.05%. This pattern could potentially recur, given the corrections some cyclical growth stocks have already experienced.
Despite entering a correction this year, Buchbinder anticipates that technology will see earnings per share growth of 20% this year, the highest among all sectors. These are the types of opportunities that investors should closely monitor, especially in light of modest growth expectations for the S&P 500 in 2025. However, it is vital to approach a correction or bear market with a balanced perspective.
“You cannot control the market,” Thomas emphasizes. “But managing your portfolio is within your control.”
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