The week-long hostilities pitting the US and Israel against Iran have been the primary focus of markets. No one knows if the current crisis will result in a pullback, correction, or bear market. But should a new bear market emerge, there is typically no place to hide from an equity perspective, cautions Sam Stovall, chief investment strategist at CFRA Research.
Outcome scenarios range from short and swift, causing oil prices to retreat as quickly as they advanced, to a parabolic surge in WTI oil prices that stay well above the $100-per-barrel level and trigger a global recession. Prior oil shocks, such as the Suez Crisis in 1956, the Arab Oil Embargo of 1973, and Iraq’s invasion of Kuwait in 1990, are worth noting, since each resulted in recessions and bear markets.
Adding to this confusion: While traditional safe havens, such as gold and the US dollar, have risen in response, bonds have not. That is possibly signaling that the cost of engaging in such military actions will only add to debt, pushing up the 10-year yield and further delaying another Federal Reserve rate cut.
Regardless of a bear market’s classification, there is typically no place to hide from an equity perspective. All sectors have posted average declines during bear markets since 1990 (which is as far back as S&P Global has sector-level data).
However, the “defensive sectors” (those that typically lost less than the overall market) include consumer staples, energy, healthcare, and utilities. The demand for their products and services remains fairly static during good times and bad.
More importantly, however, is what happens after any bear market has run its course. Typically, the sectors that lost less during the decline recorded weaker advances in the following year than those that fell the furthest.
In addition, the three worst-performing sectors during each bear market beat the S&P 500 Index (^SPX) on average in the following 12 months 100% of the time, outpacing the S&P 500 in total by more than 20 percentage points. Time will tell if history repeats or, like some singers of the national anthem, forgets the words.
