In This Article:
Stocks are getting slammed after Federal Reserve raised interest rates by 0.75% on Wednesday, the most since 1994.
With the S&P 500 in a bear market and the Nasdaq down 30% this year, it might seem hard for some investors to begin thinking about the next leg higher for the market.
A new era of high inflation would seem like a logical place for investors to begin building their shopping lists. But it's also important to pay attention to history, which can help inform the sectors and styles in the stock market that tend to do the best when the market eventually turns around.
History tells us, quite simply, the sectors that lead down during bear markets tend to lead on the way up — at least initially.
And in the interactive chart below, we can see how markets behaved going into — and out of — the last six major market downturns.
And a huge caveat before digging into the meat of the analysis — this is a study of entire sectors of stocks, not individual stocks.
More than half of the 1990s dot com companies went bust in the years after the crash. Today, many of the flashy stocks that soared during the pandemic and have come crashing back to earth will not make it.
And for those that do survive, it could take years — or decades — to reclaim their record price levels. Shares of Cisco (CSCO) at their 2021 peak, for example, were still 20% off an all-time high reached over two decades ago.
This exercise isn't about false hope, it's about letting the historical odds inform a potential outcome.
After the dot-com crash wiped out over 80% of the tech sector's valuation, tech was the leading sector for two years off the October 2002 low. The S&P Select Tech SPDR Fund (XLK) returned 91% over this period. After the Fed kept interest rates at 1% for a year, a historical outlier at the time, inflation took off, and the energy and materials sectors were the big winners.
Global Financial Crisis favors financials
But it is during the Global Financial Crisis that the analysis begins in earnest.
Financials (XLF) got slaughtered as the crisis took hold, falling over 80% — much like tech less than a decade prior. Industrials (XLI) and Materials (XLB) also helped lead the way down — coughing up 63% and 58% of their respective values.
What went down the most would lead the way up.
Financials returned 174% into the 2011 downturn, while Industrials posted gains of 148%. Consumer Discretionary (XLY) also entered the fray — up 147%.
Greek contagion was the theme in 2011, and after S&P downgraded U.S. debt in August, that was the final nail for that bull. Financials fell 34% from February to October 2011.