Co., the U.S. market “behaves much like a rubber band, with a tendency to bounce back.” The 119-year-old Dow has endured 19 bear markets with an average decline of 37%. In the years following these troughs, Ankrim maintains, the Dow has produced an average annual return of 40%.
So what does this mean? Market declines can often offer the best opportunity to buy great companies at bargain prices. You just have to know where to look.
INCREASING YOUR ODDS OF SUCCESS
Rebounding from a bear market isn’t easy, but it’s possible if you can anticipate which industries are most likely to benefit from a recovery. To increase your odds of choosing stocks that will vigorously bounce back after market routs, BLACK ENTERPRISE asked Lipper Inc., a global provider of mutual fund information and analysis, to evaluate sectors that performed best after bear markets began (see chart). By identifying areas that have better staying power during market lows, these sectors can offer valuable clues on how to minimize losses and reposition your holdings to maximize gains.
Lipper tracked six sectors4healthcare, real estate, utilities, technology, natural resources, and financial services4and charted their average percentage growth at six months, 12 months, and 36 months after the start of the last four bear markets (including the one that began in March 2000).
Research analyst Jeff Tjornehoj defined growth in each sector as “the post-bear bounce,” a measure that indicates which sectors stand to make a quick recovery. Although each bear market is different and no market theory is absolute, he asserts, “The longer [period of] time invested, the better off each sector performed.”
Indeed, each sector Lipper analyzed showed an average increase of at least 17.5%, 36 months after the start of a bear market (the March 2000 bear market was excluded from this average). Therefore, long-term investors have the best shot at their portfolios producing substantial gains.
The sector with the best track record: healthcare. “Healthcare and biotech are going to do better because there are more people who are older and require drugs,” explains Tjornehoj. “When you add the increase in advertising, which has helped consumers become more aggressive about asking for medications, they become safe, defensive positions.” The healthcare sector averaged 7.37% at six months, 7.9% at 12 months, and 46.95% at 36 months after the last four bear markets. Picking from our list of “22 Stocks for 2002” (see January 2002), Merck & Co. (NYSE: MRK) could benefit from the coming recovery because of its current pipeline of popular treatments, such as the arthritis drug Vioxx and the cholesterol-blocker Zocor.
SECTORS TO BRIGHTEN UPYOUR PORTFOLIO
The next bright spots were real estate and utilities. Although these sectors averaged minimal gains six months after a bear market began, they produced returns of 7.95% and 6.72%, respectively, after 12 months. And, after a 36-month period, they really gave investors’ portfolios a boost: Real estate was up 31.88%, while utilities surged 36.12%. “Real estate is a good bet because people like the comfort of hard assets in a downturn,” says Tjornehoj.