'Anything Works in a Bull Market.' But What About a Bear Market?

Bull markets are characterized by investor optimism and sustained growth that fuels gains across most sectors. That's why the saying "anything works in a bull market" is largely true. While that does not necessarily apply to meme stocks, IPOs or other speculative investments, when the market is healthy, stocks tend to move up and to the right. But when the tide turns, finding success in a bear market — or a prolonged drop of more than 20% from a recent high — can be a daunting task.

That is something investors may want to begin preparing for. Since the last bear market ended on Oct. 14, 2022, the S&P 500 gained 70.65% through Feb. 14, 2025, when the most recent sell-off began. More than a month later, the major indexes are in or on the verge of a correction, marked by a drop of 10–20% from a recent high. The S&P 500 is down 8.50% from its year-to-date high and briefly entered a correction last week. The Dow Jones Industrial Average (DJIA) is close behind, down 7.57% from its six-month high, and the Nasdaq — down 12.83% from its six-month high — entered a correction during the first week of March.

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Regardless of whether this downturn develops into a bear market, history provides clues about how to best approach serious declines, which can help alleviate investors' fears when the market takes a turn for the worse. Knowing which sectors traditionally outperform during downturns — and which underperforming sectors present buying opportunities — is equally important.

Finding balance

When fear consumes the market, remaining disciplined and not reacting impulsively is paramount, according to Tim Thomas, chief investment officer and wealth manager at Badgley Phelps.

"It's important to stay balanced and not get too far over your skis in one direction or another," Thomas says. "Have a little bit of exposure to traditional defensive [sectors], but also take advantage of the declines in some risk-on stocks that are more cyclical, like tech."

Defensive sectors serve as safe havens during market downturns because they are historically less volatile. But finding an equilibrium between lower-risk, lower-reward sectors and higher-risk, higher-reward stocks is essential. " You've got to have a foot in both camps," he says. "It's really important not to get too bearish or too defensive."

Understanding where we are in the market cycle can help determine that balance. According to Thomas, that means preparing for bear markets during bull markets and preparing for bull markets during bear markets. But in order to accomplish that, investors need to know where to look for both safety and opportunity.

Big and boring

During downturns, certain corners of the market have protected investors better than others. Thomas suggests targeting best-of-breed companies, specifically in difficult times, which can act as cornerstones of a portfolio for the long term.

"We look for very strong balance sheets, great management teams and companies that have a distinct competitive advantage that really can't be eroded quickly," he says. "They tend to generate consistent earnings and consistent returns for investors over long periods."

These often include long-standing organizations in sectors that are well-equipped to endure various market cycles and economic disruptions. Historically, they have fallen into a handful of the S&P 500's 11 sectors, which tend to outperform during elevated volatility and prolonged bearishness. The consumer staples and consumer discretionary sectors, for example, can serve as bellwethers for the direction of the overall market. When consumer confidence and spending are high, indicating a strong economy, that often translates to stocks in the consumer discretionary sector performing well. But when that sector lags and consumer staples outperform, it can be indicative of a late-stage bull market.

In 2022, the consumer staples sector posted a loss of 0.6%. While that wouldn't typically turn heads, during that bear market, it was good enough for a third-place finish among all sectors. At the same time, consumer discretionary finished second-worst among all sectors with a loss of 37%.When economic conditions worsen, needs outweigh wants and consumer and discretionary purchases — such as dining out, travel and entertainment — are often eliminated from household budgets. So far in 2024, the consumer discretionary sector has posted a year-to-date loss of 12.31% — worst among all 11 sectors by a wide margin.

The lackluster performances of cyclical and growth-oriented sectors, including tech and communication services, can also act as barometers for protracted downturns. While stocks in those categories often present investors with strong upside potential, the inverse can be true in down markets. From 2017 to 2024, tech or communication services finished first or second among all 11 sectors eight times. But in 2022, tech's 28.2% loss saw it finish third-worst, one spot above consumer discretionary, while communication services finished last with a loss of 39.9%.

On the other hand, utilities — considered defensive because electricity, water and gas are essential services — tend to perform well during bear markets. In 2022, that sector was the second-best performer after posting a gain of 1.6%. Going farther back, in the wake of the COVID-induced market crash, consumer staples and utilities recovered quickly as demand remained strong, bottoming on March 20, 2020, and posting gains of 33.83% and 31.12%, respectively, through the remainder of that year.

Another perk of investing in defensive positions during downturns is that those companies are often well-established and pay sizable dividends, which can help offset their inherently slower growth. Duke Energy, for example, was founded in 1904 and pays a dividend yielding 3.46%. From a valuation standpoint, utilities remain underpriced despite their strong performance this year, according to Jeff Buchbinder, chief equity strategist at LPL Financial. As a bonus, he notes that a lower interest-rate environment makes the dividends utilities pay out more attractive.

Buying opportunities

While the aforementioned safe-haven sectors can insulate portfolios from losses during corrections and bear markets, growth sectors that are historically more susceptible during downturns can present tremendous buy-low opportunities. Despite significant losses in the last bear market, tech and communication services went on to finish atop all sectors in 2023 and 2024, respectively, with consumer discretionary finishing third and fourth in those years.

Using a specific example from communication services, Google-parent company Alphabet lost nearly 39% in 2022 but gained nearly 59% in 2023 and more than 41% in 2024. Amazon, which falls into the consumer discretionary sector, saw similar results. After losing nearly 50% in 2022, it posted gains of more than 80% in 2023 and more than 54% in 2024.

"The consumer discretionary sector is below its average valuation," Buchbinder says. "Not surprisingly given its 14% year-to-date decline amid slowing consumer spending and sharp drops in Amazon."

Returning to the COVID-crash example, while consumer staples and utilities — defensive sectors — provided investors with safety amid the recovery, their gains paled in comparison to the tech sector's. From March 20, 2020, through the end of that year, tech gained 82.05%. That scenario could repeat given the correction some cyclical growth stocks have already undergone.

Despite entering a correction this year, Buchbinder says tech is expected to grow earnings per share by 20% this year — the best among all 11 sectors.

Those are the types of opportunities investors should pay attention to, particularly given expectations of modest gains for the S&P 500 in 2025. However, the importance of approaching a correction or bear market with balance cannot be overstated.

"You can't control the market," Thomas says. "But you can control how you manage your portfolio."

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