Bear Market Playbook: Decoding Recession Risk, Valuation Impact, and Style Leadership

Bear markets are notoriously nerve racking with every drawdown presenting its personal set of distinctive circumstances. But historical past reveals that staying invested via volatility is commonly crucial to reaching long-term success. Because the saying goes, volatility is the value you pay for long-term efficiency. Even probably the most extreme bouts of volatility haven’t stood in the way in which of success for traders who maintained a long-term method to investing.

This submit gives information to assist traders put bear markets in historic context and acquire confidence of their long-term funding plans. To do this, we analyzed 15 bear markets since 1950, utilizing the S&P 500 to match recessionary and non-recessionary declines throughout three key dimensions — throughout each drawdowns and recoveries:

Magnitude and Period of Drawdown

Magnitude of non-recessionary bears is a shallower -22% in comparison with the median -35% drawdown felt when bear markets coincide with recessions.
Period of non-recessionary bears averaged solely three months in comparison with 18 months for recessionary.

Financial and Fiscal Coverage Developments

All of the recessionary bear markets occurred with an inverted yield curve.
In the one yield curve inversion the place a recession was prevented, the deficit to GDP ratio elevated by 3% through the interval of fed tightening and curve inversion. This has additionally been true thus far in present yield curve inversion interval.

Funding Fashion Differentiation

Low Volatility and Dividend kinds have been probably the most resilient in drawdowns no matter whether or not recessionary circumstances have been current.
Restoration efficiency in non-recessionary durations favored High quality and Development in comparison with Worth and Small Caps after recessionary bear markets.

Recessionary vs. Non-Recessionary

There are key variations in recessionary and non-recessionary bear markets.

The median drawdown for recessionary bear markets was -35%, about 50% deeper than non-recessionary bears. Non-recessionary bear markets are normally attributable to momentary worry that the financial system is stalling or getting into a recession. And as constructive information emerges, the worry — and drawdown — subside. The extra 10% to twenty% drawdown appears to coincide with proof of recession lastly surfacing within the information, moreover supported by an additional 12 months of period because it digests the destructive information (not sentiment). Apparently, there was just one time in historical past that we have now skilled back-to-back, non-recessionary bear markets, and that was through the fiscally supportive Nineteen Sixties.

Determine 1: Bear Markets by the Numbers

Disclosures: Please see appendix for definitions and citations.

Bear Markets Are likely to Run Deeper When Valuations Are Excessive

For our valuation measurement, we determined to make use of the CAPE ratio as a result of trailing 12-month earnings are extremely unstable throughout recessions, thus distorting the P/E ratio. For instance, the 92% drop in earnings in 2008 didn’t mirror long term views relating to what earnings have been more likely to be 5 to 10 years sooner or later, which is the muse for point-in-time valuations.

We discovered valuation to be a horrible timing mechanism for each bear markets and recessions, however valuation did usually issue into the severity of a bear market — with lofty valuations extra usually related to extreme bear markets.

The hyperlink between the severity of the recession and the depth of the bear market is questionable at finest. For instance, the 2000s bear market began with excessive valuation that was lowered by virtually half by the point the market discovered a backside. Notably, the 2000s bear market stands out as a result of it had the smallest decline in actual GDP of all of the recessionary bears, but it produced one of many longest and deepest drawdowns.

One other instance of adjustments in valuation mattering to the severity of bear markets is the 1980 to 1982 drawdown. This was one of the vital extreme recessions and actual GDP declines. Nonetheless, the beginning valuation was low cost, particularly by at this time’s requirements, leading to a relatively delicate recessionary bear market decline of -27%.

Determine 2: Change in Valuation Throughout Bear Markets

Disclosures: Please see appendix for definitions and citations.

Earnings and GDP Impression

We took Shiller’s S&P 500 Earnings and analyzed the variations between recessionary and non-recessionary bears. The median earnings decline throughout recessionary bears was usually destructive, corresponding with the shrinking financial system. Alternatively, non-recessionary durations usually had rising earnings.

One other fascinating distinction between recessionary and non-recessionary bear markets is the place the market peaks and bottoms relative to earnings. Non-recessionary bear markets are inclined to peak and backside comparatively shut with earnings. Nonetheless, recessionary bears tended to backside upfront of earnings by 9 months.

Determine 3: Change in Earnings Throughout Bear Markets

Disclosures: Please see appendix for definitions and citations.

Financial and Fiscal Coverage: Clues to Recession Threat

Fiscal and financial coverage additionally contribute to the severity of bear markets since they’ll affect the likelihood of recessions. The yield curve stays probably the most dependable predictor over horizons higher than one 12 months, notes a Federal Reserve Financial institution of Chicago paper.

Fed mountain climbing cycles are normally the perpetrator of yield curve inversions. We depend 11 mountain climbing cycles leading to 9 yield curve inversions and eight recessions with corresponding bear markets. The present mountain climbing cycle and yield curve inversion is excluded as a result of the cycle has not but accomplished with a yield curve steadily in a constructive sloping path for not less than two quarters.

The one time a yield curve inversion didn’t result in a recession was in 1966, when the Fed was elevating charges to struggle inflation. On the similar time, fiscal coverage was expansionary, with the deficit-to-GDP ratio rising 3% on account of simultaneous spending on the Nice Society packages (Medicare and Medicaid) and the Vietnam Conflict.

Nonetheless, authorities spending will increase to spice up development are sometimes adopted by a rise in costs, as we simply noticed post-Covid. In 1967, as inflation reaccelerated, the Fed started a second collection of charge hikes resulting in the recession and bear market of 1968 to 1970.

There are similarities at this time. Financial coverage has been restrictive however has been offset by authorities spending with a 3% improve within the deficit-to-GDP ratio. If the aim of Congress and the Administration is to get the funds deficit again down to three% from its present 6% to 7% stage, we might want to scale back the deficit by roughly $300 billion per 12 months over the following 4 years. This may equate to a 1% drag on GDP per 12 months, which might be development destructive within the quick time period however seemingly not recessionary by itself.

Whether or not the fiscal discount is finished via spending cuts, tax will increase, or tariffs is much less consequential than the fast math of a 1% discount in demand working via the financial system. This isn’t an announcement on medium-to-longer-run fiscal technique’s influence on financial development.

Which Funding Types Maintain up — and When

Irrespective of the severity of the drawdown the market does get better. Nonetheless, which kinds you spend money on matter throughout each the drawdown and restoration durations. In Figures 4 to eight, we current a collection of quilt charts that recommend what traders ought to take into account proudly owning throughout and after each recessionary and non-recessionary bear markets.

It shouldn’t be a shock that in bear markets typically, extra conservative components comparable to low volatility and dividend yield outperform, and extra aggressive components like excessive volatility and development underperform. It additionally shouldn’t be a shock that this state of affairs is reversed throughout market recoveries.

Determine 4: Fashion Extra Returns: Recessionary Bear Markets Prime to Backside

Disclosures: Previous efficiency is not any assure of future outcomes. All of the returns within the chart above are in reference to unmanaged, hypothetical safety groupings created solely for analytical functions. These are hypothetical kinds primarily based on describing traits. Please see appendix for definitions and citations. Extra Return is Annualized Return over the Prime 1000 Portfolio.

Determine 5: Fashion Extra Returns: Non-Recessionary Bear Markets Prime to Backside

One 12 months after a recessionary bear market, the main kinds — apart from excessive volatility — are usually SMID and worth. In distinction, the sample following non-recessionary bear markets is markedly completely different: development and high quality have a tendency to steer. This makes intuitive sense, as non-recessionary bears are sometimes development scares relatively than full financial resets, so market management doesn’t shift. These durations usually align with the later levels of the financial cycle, when development and high quality kinds traditionally outperform.

We restricted Determine 7 to at least one 12 months after the underside of a non-recessionary bear. This was a choice created from necessity as a result of roughly a 12 months and half to 2 years after a non-recessionary bear, the market tends to expertise a recessionary bear. One other indication that non-recessionary bears are mid cycle development scares.

Determine 6: Fashion Extra Returns: 1-Yr After Recessionary Bear Markets

Determine 7: Fashion Extra Returns: 1-Yr After Non-Recessionary Bear Markets

Once we dove a bit deeper into the numbers throughout all the cycle, we seen fascinating tendencies. In Determine 8, we present market cycles after recessionary bear markets. Recessionary bears comply with the financial cycle and have a unique sample than non-recessionary bears. Unsurprisingly we see extra cyclical kinds comparable to worth and small dimension lead within the first 12 months of a brand new bull market. Worth and small proceed to steer, although at a extra modest tempo, within the second via fifth years of the brand new cycle.

Then, after the cycle reaches six years, we usually see a shift in management to the late cycle kinds like development and high quality. As development of the broad financial system moderates after years of financial and financial impulse usually seen within the early cycle, development turns into extra scarce with much less firms capable of display development unbiased of the broad financial system. This provides high quality and development a double barrel impact late cycle, combining higher development charges with a number of enlargement (shortage impact).

Determine 8: Historic Hypothetical Fashion Returns: Recessionary Bear Market Cycles

In conclusion, if we keep away from a recession, we will count on the worst of the volatility to be over and for high quality and development to proceed to steer primarily based on historical past. If we inevitably tip right into a recession, we seemingly have decrease and longer to go together with low volatility, dividends and worth traditionally serving to scale back the ache. The following rebounds from recessions have been traditionally good instances to rebalance into the small- and mid-cap elements of the market.

This submit goals to offer traders with historic information on bear markets to supply perspective and construct confidence in long-term investing. Bear markets are the value we pay for the exceptional compounding potential of equities. By higher understanding the place we’re within the financial cycle — and what sort of bear market cycle we could also be experiencing — traders and advisors alike can use historic patterns to handle expectations, navigate uncertainty, and place portfolios for each resilience and restoration.

Appendix & Citations

Figures 1-3: Bear Market Knowledge Tables

S&P 500 Index Ranges. FactSet, 2025.
Blinder, Alan. 2023. “Landings, Comfortable and Arduous: The Federal Reserve, 1965-2022.” Journal of Financial Views—Quantity 37, #1—Winter 2023—Pages 101–120
Federal Reserve Financial institution of New York. The Yield Curve as a Main Indicator. https://www.newyorkfed.org/analysis/capital_markets/ycfaq.html.
Shiller, Robert J. On-line Knowledge: U.S. Inventory Markets 1871–Current and CAPE Ratio. Yale College Division of Economics, http://www.econ.yale.edu/~shiller/information.htm.
Nationwide Bureau of Financial Analysis. US Enterprise Cycle Expansions and Contractions. https://www.nber.org/analysis/information/us-business-cycle-expansions-and-contractions.
US Bureau of Financial Evaluation, Actual Gross Home Product [GDPC1], retrieved from FRED, Federal Reserve Financial institution of St. Louis; https://fred.stlouisfed.org/collection/GDPC1, Could 1, 2025.
Kelley, David. 2019. Which Main Indicators Have Completed Higher at Signaling Previous Recessions? Chicago Fed Letter No. 425. Federal Reserve Financial institution of Chicago. https://www.chicagofed.org/publications/chicago-fed-letter/2019/425.

Figures 4–8: Quilt Charts and Market Cycles Chart

Knowledge Supply: Compustat
Calculation: Hartford Fairness Modeling Platform

Fashion and Time Interval Definitions:

Worth: US Prime 1000 Shares high 30% primarily based on Composite Worth as outlined by a number of equally weighted valuation metrics to reach at an aggregated valuation metric. Valuation metrics embrace P/E, EBITDA/EV, Working Money Stream/EV, Income/EV, and B/P Yield (used solely in financials and actual property as a alternative to EBITDA/EV), then cap weighted.
Low Volatility: US Prime 1000 Shares high 30% primarily based on a Composite Volatility rating outlined by a number of equality weighted volatility metrics to reach at an aggregated volatility metric. Volatility metrics embrace 3 Yr weekly Beta and 6-month every day Std Deviation, then cap weighted.
Excessive Volatility: US Prime 1000 Shares backside 30% primarily based on a Composite Volatility rating outlined by a number of equality weighted volatility metrics to reach at an aggregated volatility metric. Volatility metrics embrace 3 Yr weekly Beta and 6-month every day Std Deviation, then cap weighted.
Dividend: US Prime 1000 Shares high 30% primarily based on trailing 12month dividend per share divided by present share worth, then cap weighted.
High quality: US Prime 1000 Shares high 30% primarily based on Gross Earnings to Property, then cap weighted.
Development: US Prime 1000 Shares high 30% primarily based on 5 Years Gross sales Development, then cap weighted.
SMID: US Mid-sized & Small Cap shares representing the smallest 15% and 13% of shares respectively, excluding the very smallest 2% that are categorized as microcap, then cap weighted.
Mega/Massive: US Mega & Massive Market Cap shares with Mega representing the biggest 40% and huge cap representing the following largest 30% of the universe, then cap weighted.
Prime 1000: US Prime 1000 Shares, cap weighted.

Interval Definitions for Market Cycles Bar Charts:

Recessionary Bear Markets
- Yr 1: The 12 months instantly following a bear market interval. Years 2-5: Months 13-60 following the previous bear market. Yr 6+: The interval after month 60 till the following bear market
- Bear Market: Any interval when the US Market dropped by 20% or extra with a corresponding recession

*It is very important word that we outlined bear markets as -19% or higher declines from all-time highs, given the unusually great amount of -19% declines and shoppers rightly are as anxious to lose -19% as -20%.

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