As a reminder, a bear market is a decline of at least 20% from the recent high. Every bear market has its specific cause. The 2000 Tech Crash was an overinflated bubble of empty promises that led to the Nasdaq being down 75% to 80%. Is the market right now as bad as that? I don’t think so.
During that 2000 crash, the price-to-earnings ratio was around the 30 range, which means investors were paying 30 times earnings for the overall market. Today, price-to-earnings is around 16 or 16½. There are pockets of today’s market that remind me of 2000, like crypto, but the overall picture does not.
What about the Financial Crisis of 2007 and 2008? That period was, arguably, much worse than today. Irresponsible home loans triggered massive overbuilding. As soon as the banks realized it was unsustainable, they hardened lending standards. Housing values crashed and the economic system imploded. Today, housing prices are high, but I believe we still have an undersupply and households are relatively unlevered.
How about 2020 and the pandemic? That, to me, was particularly alarming. The U.S. essentially shut everything down, as did most other countries around the globe. We had stay-at-home orders in every state, leaving a giant question mark around company earnings. That’s why the market fell almost 35% in roughly a month.
I don’t believe today’s economy is nearly that weak. Historically, when heading into a recession, the U.S. had been adding between 134,000 and 198,000 jobs per month over the prior three to six months, adjusted for the size of today’s labor market. Today we’re adding between 408,000 and 505,000 jobs.
The labor market shows low unemployment — two job openings for every one person looking. The Federal Reserve is raising rates and filtering excess money out of the economic system. The glory days of incredibly low-interest rates are in the rearview, but we can do just fine at the 4% to 6% range.
Through the first half of 2022, the S&P 500 fell by almost 20% but a quick comparison of the last 12 bear markets, starting in 1961, reveals that that’s below average. A trough-to-peak recovery normally requires about 1.7 years, but in each of those 12 scenarios, almost one-third (30%) of the recovery came within the first 30 days.
Today’s economic anxiety is convincing some folks to pull money from investment accounts. I understand the urge but typically recommend resisting it if possible. Missing out on 30% of a market recovery is a tough lesson to learn the hard way.
Enough talk about what’s going wrong. Let’s talk about what is working.
Now that we’re past the midway point of 2022, the message is clear — value companies have generally held up better than growth companies. As a reminder, value investing is a style that focuses on companies that might trade at prices below their worth, often allowing them the ability to pay dividends to shareholders. For example, value stocks can be companies in the consumer staples sector that manufacture food, beverages, household goods, and hygiene products.
In contrast, growth companies make more noise and dominate the headlines. They may not currently generate any revenue, but their future earnings capacity is promising. Most of the money the company makes gets reinvested back into the company. That can mean no dividends for shareholders.
Comparing the Russell 1000 Value Index vs. the Russell 1000 Growth Index through the first half of the year, you can clearly see the divergence in performance. Through the first half of 2022, value stocks have declined 12.3% while growth stocks have fallen 27.3%.
Value stocks have outperformed growth stocks by more than two times, and their price-to-earnings ratio is nearly 40% lower. In fact, value companies currently have a lower price-to-earnings ratio than their 10-year average, so it’s even inexpensive on a historical basis.
When we drift into choppy waters, as we have in 2022, the violent swells tend to slam into the more exuberant vessels — the growth indexes, the Nasdaq, and cryptocurrencies. Value, dividend-oriented stocks can often stay afloat with challenges the tide brings.
Read the full AJC article here
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