Surviving a bear market is one thing. The typical reaction of many investors is to go to cash or bonds and stay out of equities altogether. Profiting during a bear market is another issue, and while it may seem difficult, if not impossible, investors can find strong stocks to survive and thrive with the broader market slumps. The best place to start is sector-level research.
Do Your Research
The best way to find those sectors and stocks that hold up well, or at the very least hold up better than the broader market during down periods, is to do your homework. Analyze the performance of major sectors during bear markets such as the ones seen in 2001-2003 or 2007-2009 to establish which sectors proved durable. Over the course of history, the sectors that have often proven sturdy during U.S. bear markets have been consumer staples, health care and utilities.
Look For Value Stocks
Another element to add to sector-level research, particularly during bear markets, is locating those sectors that are home to plenty of value stocks. Chances are a bear market in stocks was brought on by a deterioration in economic data such as declining gross domestic product growth, rising unemployment and decreasing consumer confidence. Any and all of those scenarios hamper growth stocks. Investors and traders view growth stocks as needing a sanguine economic environment to flourish, so value stocks tend to hold up better during bear markets.
Find Sectors With Plenty of Dividend-Payers
Since 1940, dividends and reinvested dividends have accounted for 90 percent of the S&P 500's total return, according to Guinness Atkinson Funds. The firm also notes that dividends are less volatile than earnings, which can provide investors with a buffer during bear markets and recessions. Low-volatility sectors with large amounts of dividend payers include consumer staples and health care.
Don't Abandon Consumer Sector
Because bear markets for stocks can be caused by slumping economic data, conventional wisdom often dictates that investors should stay away from sectors that are tied to consumer spending. That is true to an extent, but a bear market in stocks does not mean consumers will suddenly start making clothes, food and other necessities at home. Slumping stock markets and economic environments do favor one sub-segment of the retail space: discount retailers. In this case, investors may want to hunt for dollar stores or big chains with significant pricing power over competitors.
Todd Shriber is a financial writer who started covering financial markets in 2000. He worked for three years with Bloomberg News and specializes in analysis of stocks, sectors and exchange-traded funds. Shriber has a Bachelor of Science in broadcast journalism from Texas Christian University.