Bear markets always signal a leadership change within the overall equity market. The leadership going into a bear market is rarely, if ever, the leadership coming out. Because of this rule of thumb, we view bear markets as periods of extreme opportunity. In our view, this cycle has so far been no different: leadership seem to be changing as the current bear market progresses. (See Chart 1)
Bear markets occur when the economy structurally changes. Leadership before a bear market is typically geared to the economy in place, but leadership shifts as the economy shifts. Volatility occurs when a prior leadership suited to a pre-existing economy surrenders to a new leadership better matched to a new economic backdrop.
The economy is constantly changing, and markets adapt to those changes. History clearly shows it is unrealistic to expect one segment of the equity market to be appropriate for every economic scenario.
However, despite historical precedent, investors are typically hesitant to reposition portfolios when the economy changes. They tend to cling to the old leadership hoping those stocks’ underperformance is only temporary, and the economy and the markets will soon revert.