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Like Snowflakes, No Two Bear Markets Are Alike

There are no absolutes when it comes to value versus growth.

Kevin McDevitt, 12/20/2016

A longer version of this article was published in the November 2016 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.

When I was starting my career as a Morningstar analyst in the late 1990s, one of my closely held beliefs was that value stocks were lower-risk than growth stocks. I believed that value-oriented funds would always hold up better in a bear market than those that owned growth stocks.

After reading books by Martin Zweig and David Dreman, I believed that the low price multiples of value stocks meant that they inherently had less risk than growth stocks. Expectations were, by definition, lower for value stocks. Meanwhile, I interpreted growth stocks’ higher price multiples to mean that any slip in company fundamentals would ravage their share prices. I had a lot to learn.

But, in the short run, value stocks did weather the storm better during the next two bear markets. (See the table.) The first came in 1998's third quarter when Russia devalued the ruble and defaulted on its debt. This occurred while the dot-com bubble in the United States was still inflating. From mid-July through early October 1998, the Russell 3000 Index, a proxy for the U.S. stock market, fell 21%. Growth stocks did a bit worse, with the Russell 3000 Growth Index dropping 23.3%, while the Russell Value Index fell a milder 18.6%.


  - source: Morningstar Analysts

Value stocks outperformed by a wider margin during the next bear market. When the dot-com bubble finally burst in March 2000, growth-oriented technology stocks--and Internet stocks in particular--were truly priced for perfection. Of course, Internet stocks weren’t the only shares trading at ridiculous price multiples. Huge swaths of the equity market were overpriced. Even mature companies like General Electric GE and Coca-Cola KO traded at trailing price/earnings ratios near 50 times or higher.

Even so, growth stocks, and technology shares in particular, took the brunt of the bear market that began in March 2000. The pain lasted for nearly three full years, and the Russell 3000 Growth Index fell a brutal 61.5%. The Russell 3000 Technology Index collapsed by nearly 80%. Value stocks, many of which were ignored by investors during the late 1990s rally, dropped just under 20%, as measured by the Russell 3000 Value Index.

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