Winning industries in bear market rallies

The success of mining shares during dead cat bounces seems intuitive enough. After all, when investors are focusing on better times ahead for the economy, they might well buy into cyclically sensitive, riskier industries such as mining. But if that's the case, it is strange that construction & building materials, travel & leisure or general industrials don't have a better record during such times.

Given that life insurance companies own vast equity portfolios as part of their business, it is understandable that they should prosper during any sharp up-move in the market. The same applies to financial services – a sector made of stockbrokers and asset managers. These firms are essentially a geared play on the wider stock market, and enjoy exaggerated gains during periods of market strength.

And the losers

There are rather more clear losers during bear market rallies than there are winners. 'Defensive' sectors do particularly badly, which is exactly what one might expect. Utility firms, beverages and supermarkets are traditionally some of the best-performing sectors during bear markets overall, so it seems obvious enough that they should lag behind once investors start buying into shares again.

Not all those who suffer during bear rallies are industries with low sensitivity to the economy or the stock market, however. Industrial transport, general retailers, and support services also have an underwhelming record.

So is it over?

Between the highs of June 2007 and the lows of March 2009, the UK stock market fell 48.9 per cent over 451 trading days. This is almost the same drop as occurred in 2000-03, although some way short of the 69 per cent collapse in the mid-1970s. Both those prior bear markets lasted more than 600 days, making the current episode rather shorter.

The gains achieved by the UK stock market since early March would qualify as the strongest bear market rally in the 40-year period that we looked at. This might well be a clue that this move could be the real deal, rather than another false dawn.

However, by the standards of America in the 1930s or of Japan in recent years, the most recent rally is nothing to write home about. During both those periods, the Japanese and US stock markets experienced several rallies of more than 30 per cent. Each of these gave way to new lows. While bear markets can continue for extended periods, they do not fall in a straight line throughout. As of the end of March, America's S&P 500 had fallen for seven quarters in a row. Long strings of gains or losses like this are often followed by a big reaction in the opposite direction, if only for a while.

The longest sequence of negative quarters was eight and occurred just after the First World War. That period gave way to the roaring bull market that culminated in the Wall Street Crash of 1929. We do not expect any repeat of that this time. But one or two quarters of positive returns seems a probable scenario.

Valuation is another major reason why the great bear market seems likely to run further. Looking at four major lows in the US market going back to 1871, the market has tended to bottom on a cyclical price-earnings ratio of 11.2 times. The lowest reading reached in the current sell-off was 14.6 times.

UK bear markets since 1969

Bear market rally winners

Bear market rally losers