Vanguard: No Two Bear Markets Are Alike

June 22, 2018 — 11:14 AM EDT

While no one is calling for a bear market in the stock market any time soon, investors trying to look at the past to gauge when it could happen in the future may have a tough time. While investors all share stress during bear markets, that is where the similarities stop, making it impossible to find two that are alike.

After all, according to Chris Tidmore, senior investment strategist at Vanguard Investment Strategy Group, there are a lot of factors that cause bear markets, including political events, overvaluations, changes in monetary policies, wars, natural disasters and many more. "Trying to anticipate whether any of these possible catalysts will manifest and how they might affect equity markets has proved to be quite difficult," said Tidmore in a research report.

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Take the past two bear markets for an example. According to Tidmore, when the tech bubble burst back in the early 2000s, information technology, telecom and utilities took the biggest hit, with REITs one of the best performing sectors. Fast forward to the bear market due to the financial crisis in 2008 and 2009, and REITs, financials and industrials were bearing the brunt of the malaise. Meanwhile, during that bear market, utilities were able to outperform.

Need more evidence of the difference between bear markets? Tidmore noted that, during the tech-led bear market, large-cap growth was the worst performing sector, while mid-cap and small-cap stocks outperformed. On the other hand, during the bear market brought on by the financial crisis, large-cap growth stocks outperformed, while large-cap value stocks were the worst performers.

Active managers also differed during both bear markets, with the top performing managers during the tech-induced bear market not at the top during the financial crisis-led bear market, supporting the argument that an active manager's success in one bear market doesn't guarantee success in the next one. Tidmore noted that this also supports Vanguard's research showing that, historically, investing with lower-cost managers gives investors the best chance of success even in bear markets.

In November, Vanguard, one of the world's largest fund companies, warned that the stock market is long overdue for a correction and gave it a 70% chance of that happening in the near future. Those predictions proved true, with stocks selling off by 10% or more in the middle of February. Equities have been recovering, but market watchers have been warning that we are entering the middle to late stage of the economic cycle.