How Do Sectors, Growth & Value Perform in Bull Markets?

An investor recently asked Morningstar analyst Kevin McDevitt, CFA, about the performance of different industry sectors and different investment groups, like growth and value, during bull markets.

According to McDevitt, the results of his research are quite similar to what he found when looking at bear markets.

“As you might imagine, the results during the last five bull markets — the last of which is ongoing — are to some extent mirror images of what we found for the last five bear markets,” he explained in a recent Morningstar Fund Spy article.

“The best-performing sector during the 1998-’00 rally, technology (as measured by the Russell 3000 Technology Index) — which gained an earth-shaking 140.6% annualized gain during that 18-month period — was subsequently the worst-performing sector during the 2000-’03 bear market, falling an annualized negative 78.1%,” he added.

As he reminds investors and advisors, there are certain “near truths” to keep in mind about the markets: Reversion to the mean “is at least a strong tendency as bull markets become bear markets and vice versa,” says McDevitt.

Growth vs. Value Stocks

The Morningstar analyst says he is a bit surprised that growth stocks — as tracked by the Russell 3000 Growth Index — performed better than their value counterparts in three of the last five bear markets or corrections.

Value stocks, though, have beaten their growth cousins during three of the last five rallies, including the current one, he points out.

Value-oriented sectors led the way in each of the five bull markets, with energy beating the pack with 31.1% annualized returns during the 2003-’07 bull market thanks to the spike in oil prices.

Also coming in with a strong performance in a bull market is the materials sector, which did particularly well in 2009-’11 and 2016 to now.

“In fact, materials beat the Russell 3000 in three of the last four bull markets, with its only dud in the 1998-2000 rally. Who would have guessed?” McDevitt said.

This sector, he adds, is presently seen as the most overvalued by Morningstar’s equity analysts.