What should you keep in a market correction: winners or losers?
With the stock market at or near record highs and so much good news in stock valuations, many investors are wondering if we are due to a market correction. History has little to teach us there. Again and again, investors who try to time the markets are usually wrong.
But history offers us a valuable lesson about what happens – and which stocks survive best – when prolonged declines occur. A lot of people assume that it’s the high-end stocks that suffer the most from a correction or a bear market, but we’ve found that it’s the opposite group that falls the most when the markets tumble.
To explore this problem, my research assistant, Elan Guzman, and I dug into the market data of 11 events over the past 30 years in which the S&P 500 fell 10% or more before reverting to its old. Mountain peak. The median duration of these slowdowns was 65 days.
Using all of the companies listed on the Nasdaq and NYSE as a universe, we looked at the performance of each stock over a one-year period until the start of each correction. From this data, we identified the companies that represented the top 25% in terms of returns and rated them as “winners”. We also found the bottom 25% and labeled these “losers”.
Next, we looked at how these two groups performed during downturns to see which suffered the least during those times.